FT : South Africa survives Moody’s downgrade to face a bigger threat
Low borrowing costs give Pretoria the veneer of resilience
South Africa dodged a bullet on Friday when Moody’s Investors Service, the credit rating agency, opted to put the country’s local and foreign currency bonds on review for a downgrade but not to join its peers, S&P and Fitch, in outright dropping the country’s rating into junk.
S&P’s removal of South Africa’s investment grades on Friday was enough to expel its local currency bonds from the Barclays Capital Global Aggregate Bond Index, tracked by about $2bn of foreign capital. But Moody’s saved the country from expulsion from the Citi World Government Bond Index, tracked by $8bn. This has sparked indignation in some analysts. “How can you have places like Argentina and Ukraine, with reform programmes in place, seven or eight notches below South Africa?” asks Simon Quijano-Evans, of Legal and General Investment Management. “What signal does that send to the government?”
Others say the yields on South African bonds already reflect the assumption that a downgrade by Moody’s is on its way. Yields — which rise when prices fall — have moved sharply upwards since October, when the government slashed its growth forecasts. Yet bond yields have recovered some ground from a peak earlier this month. The rand, too, has come back since then. On Monday, it quickly sprang back from Friday’s fall against the US dollar. It has almost recovered all its losses since the shock in October.
We have seen this before. Back in March, South African bonds and the rand took a battering when president Jacob Zuma toyed with and then fired Pravin Gordhan, the last finance minister to care much about reform or credit ratings. Both asset classes recovered within a few months.
Investors and the government in Pretoria may conclude that nothing really matters. Global liquidity and the search for yield mean that South Africa’s borrowing costs as a share of GDP are manageable, whatever happens to hopes for reform. Some investors see Moody’s decision to put South Africa on review as a buying opportunity. Yet that action has also put a cloud of uncertainty over South African markets for months to come. The weak dollar has helped the South African rand this year. Should US monetary policy turn hawkish, South Africa will be among the emerging markets at greatest risk.