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$10bn outflow, two-notch downgrade risk

Economy
Johannesburg - The sacking of South Africa’s respected finance minister leaves the country risking a two-notch downgrade on its local currency credit rating, which would see it ejected from a key bond index and cause up to $10 billion (R134 billion) in outflows, UBS said on Friday. Investment outflows at that level would effectively double South Africa’s current account gap.

President Jacob Zuma’s midnight ouster of Finance Minister Pravin Gordhan deepened a financial market selloff caused by political uncertainty that had been brewing all week.

The departure of Gordhan threatens to tip South Africa’s higher profile foreign currency credit rating, currently one notch above so-called junk at BBB-/Baa2, into non-investment grade. Moody’s is scheduled to review the rating next Friday.

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Pravin Gordhan

UBS said, however, that a bigger danger lay in local currency debt.

Read also: Assets tumble on Gordhan sacking

Rated two notches into investment grade, South Africa is one of the few emerging economies whose local currency bonds are eligible for Citi’s World Government Bond Index (WGBI), a global benchmark tracked by more than $3trillion (R40.2trln) worldwide.

A two-notch cut to local ratings would exclude the country from the index, UBS noted, estimating WGBI-indexed South African bond holdings at $10billion - just above the country’s 2016 current account deficit of $9.5bn, or 22percent of total foreign holdings of South African debt.

WGBI membership hinges on investment grade ratings on local debt.

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