A staggering $11 billion in foreign investments could be withdrawn from South Africa when the World Government Bond Index (WGBI) factors in South Africa’s downgrade to Ba1, commonly called “junk”, by Moody’s Investor Service.
Friday’s shock announcement, coming as it did on the first day of the country’s 21-day Covid-19 lockdown period, had an immediate effect on the rand.
It slipped through the R17 mark and last night reached a record low of R18.06 to the Greenback.
It’s the weakest hold the local currency has had in its trading history with the USD.
Previously, during a “flash crash” experienced in Asian trading in January 2016, the rand fell to R17.92.
An interest cut of 20 basis points by China’s central bank slowed the rand’s slippage, providing some hope for the struggling currency.
Bianca Botes of Peregrine Treasury Solutions told BusinessTech that “deteriorating fiscal metrics and poor structural economic growth prospects were some of the main contributors to the downgrade”.
She stressed that the downgrade could not have come at a worse time for South Africa, reeling as other countries are from the severe impact of the coronavirus pandemic.
The previous Baa3 rating that the country tenuously held onto after Fitch and S&P Global junked sovereign debt in 2017, meant South Africa was still able to trade government bonds on WGBI, an investment position that will now be denied after Friday’s downgrade.
According to money and markets writer, Helena Wasserman, investment-grade bold-holders will now be forced to sell SA government bonds.
In stark contrast to the expected sell-off of $11 billion, she writes that in certain quarters a much higher figure of $200 billion could be divested from South Africa.
“Theoretically, foreigners would now demand a higher interest rate when they lend money to a ‘junk’ South African government. Government would have to pay more in interest, which means less money for services (healthcare, education etc) and investments in infrastructure.”
Unless serious action is taken to rein in government spending and lending, Moody’s expects South Africa’s debt-to-GDP ratio to reach 91% by 2023.