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Moody's Downgrade

On Friday, 27 March 2020 Moody's (one of the three major credit rating agencies) downgraded South Africa's sovereign credit rating to sub-investment grade while maintaining a negative outlook. Fitch and S&P (the other two major agencies) both downgraded South Africa to sub-investment grade in 2017.

Moody's highlighted the following primary drivers in coming to their decision:

  • Structural economic bottlenecks that limit GDP growth potential and employment creation.
  • Deteriorating public finances and unfavourable debt dynamics.
  • Uncertainty around structural reforms and implementation risk.

A downgrade usually coincides with higher borrowing costs for government, and higher interest rates which will be negative for business since funding costs increase across the board. It also usually translates to a weaker rand because of foreign investors selling government debt and leaving South Africa as an investment destination. This will be bad for importers but good for exporters. Neither bond yields nor the rand reacted much to this event specifically. This is because the downgrade added to a flurry of negative news but did not surprise the market at the time.

At the time, we had already seen an increase in government's cost of borrowing in anticipation of the downgrade, higher borrowing requirements, and risk-off sentiment aside from the downgrade. The focus now shifts to government's ability to effectively manage its debt profile and implement structural reforms.

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