Johannesburg - A potential downgrade of SA’s debt rating to junk has already been factored into investment planning.
This is according to Andrew Morton, head of advice at FNB Financial Advisory, who says most local investors and prudent advisors have already factored the potential occurrence into their investment planning, by ensuring that diversification is in place, including offshore exposure.
This comes after Moody’s on Tuesday said SA’s chance of being downgraded towards the end of the year was less than 50 percent.
The international ratings agency did, however, warn that a cut could happen if gross domestic product doesn’t come in at 0.2 percent. Currently, growth for the year is expected to be flat, although the country averted a recession in the second quarter.
Moody’s also warned that any move to arrest Finance Minister Pravin Gordhan would threaten the continuation of current economic policy.
Read also: Rand gains after remarks by Moody’s
Moody’s has South Africa two notches above sub-investment, or junk, grade, with a negative outlook, and has warned that political infighting, weak economic growth and mounting debt at state-owned entities all posed a downward risk. Moody’s next review is expected on November 25.
Fitch Ratings and S&P Global Ratings assessed the debt at one level above junk.
A decline to non-investment grade could lead to capital outflows at a time when the economy is expanding at the slowest pace since 2009.
Morton says there are several potential consequences of a ratings downgrade.
This includes that South African bonds would be deemed ‘riskier’- meaning investors will require higher yields on their investments.” Investors with existing exposure to the bond market would see their capital values negatively impacted.”
Morton adds “stock market investors would also take a hit. Looking more broadly, the economy would inevitably take a knock, credit would be harder to come by, the banks would tighten the reins on lending, and investment and business development would be curtailed as a result. The rand would weaken, driving inflation and taxes higher.”
Morton adds South Africans can ease the pain by ensuring they have adequate exposure to other markets.
“Whether a rating downgrade happens or not, this approach will inevitably leave a savvy investor better off and more able to weather other global contagions,” says Morton.
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