South Africa’s credit rating cut further into “junk”

The South African rand took a hit on Friday following the downgrade of the country’s credit rating. Standard & Poor’s lowered further the long-term foreign currency sovereign rating into “junk” territory, to “BB” from “BB+”. The rating agency also slashed the country’s local currency investment grade as it lowered the rating to “BB+” from “BBB-“. In addition, Moody’s placed the Baa3 rating on review for downgrade. According to Moody’s, “The decision to place the rating on review for downgrade was prompted by a series of recent developments which suggest that South Africa's economic and fiscal challenges are more pronounced”.

USD/ZAR rose almost 2.60% in a matter of minutes and hit 14.4656 before the closing bell. However, the currency pair reversed losses on Monday morning, with USD/ZAR easing to 13.90. South Africa’s sovereign yields barely reacted to the news with both the 2-year and 10-year yields rising only 6bps. The lack of reaction from investors suggests that the downgrade doesn’t change anything right now. Given that the country had already been stripped of its investment grade rating in April this year. However, it still sends a negative signal to investors and acts as another warning for the country. Indeed, little has changed since the last credit rating cut: the growth prospects remain weak and the debt burden keeps increasing. A downgrade to junk by Moody’s would exclude South Africa from the World Government Bond index, which will eventually add further pressure on bonds’ price. We expect further weakness in the rand as the government will likely takes its time to come with a clear plan. USD/ZAR should continue moving towards 14.75.

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