London - If South Africa loses two of its prized investment grade credit ratings for foreign and local currency borrowing in the turmoil triggered by the sacking of the finance minister, the country could lose more than $10 billion in investment funds.
S&P Global has already struck. In an unscheduled review on Monday that prompted a selloff in South African assets, it cut the sovereign rating for external debt to BB+, one notch below investment grade - or "junk" status in market parlance.
It cited the impact of the divisions in government that led to Pravin Gordhan's removal.
Moody's later placed South Africa on review for downgrade. A third major international ratings firm Fitch warned that President Jacob Zuma's shake-up intensified political risk and signalled policy changes that could undermine its credit score.
Being downgraded to junk by at least two agencies will see South Africa drop out of some widely used global bond indexes that rely on investment grades only and force international funds who track these or who are prohibited from holding sub-investment grade securities to sell.
"The problem has just started in South Africa - there was a lot of complacency on the ratings shift," said Salman Ahmed, chief global strategist at Lombard Odier.
Read also: S&P first to give SA 'junk' rating
The prospect of such a demotion is more imminent for hard currency debt, where Fitch's standing rating is just one notch above junk. The Moody's rating is two rungs above.
But a bigger impact on the country's access to funds could come if two of the three agencies also demoninate the rand-denominated government debt as sub-investment grade. S&P's local currency rating is just one level above junk as well, with Moody's two notches above.
So far, only one of the six ratings - three for sovereign debt and three for local - from the major international ratings agencies has slipped into junk.
JPMorgan - which compiles some of the most widely used emerging market debt indexes - estimates that a junk rating for South Africa's mostly dollar-denominated foreign currency Eurobonds could see forced selling of up to $2.4 billion.
Roughly half the total would come from funds dedicated to investment grade emerging market debt, the other half from global investment grade bond funds, JPMorgan said, adding this was much less than the forced selling risk the bank had ascribed in recent years to Brazil at $6 billion or Turkey at $7 billion.
"The more modest figure for South Africa is explained by the smaller bond stock, and therefore smaller weights particularly in widely used global bond indexes, coupled with an underweight positioning by investors," the bank said.
Yet South Africa's outstanding $14.6 billion hard-currency debt is just a 10th of total public government debt, with local sovereign bonds tallying up to 1.722 trillion rand ($125 billion), according to data from the National Treasury.
For UBS, the real danger lies in local bond markets. In a note this week, UBS estimated some $10 billion of South African bond holdings are indexed to Citi's World Government Bond Index (WGBI), tracked by $3 trillion worldwide.
JPMorgan, which compiles the GBI-EM IG-only index, said it estimated that a downgrade of local currency debt could lead to total index-related selling of as much as $8.5 billion.
Inclusion in both indexes hinges on investment grade ratings on local debt from both Moody's and S&P Global. Whle a formal index exclusion could take up to a year, many funds would likely exit the debt in advance.
Read also: Moody's places SA on review
Partially offsetting that hit is the fact that countries which find themselves downgraded to junk - so-called "fallen angels" - often draw in a different investor base seeking higher yields and more speculative investments, said Nafez Zouk, senior economist at Oxford Economics.
In other words, these fallen credits become bigger fish in smaller ponds.
Some dedicated emerging market fund managers are waiting for those opportunities.
"[South Africa's] trajectory is quite negative and is likely to continue to be negative until we see renewal in South African politics which could be a few years from now," said Jan Dehn at emerging market fund manager Ashmore Investment Management.
"Even in a gradually deteriorating credit like South Africa, asset prices can move into oversold territory relative to the risk ... If prices fall enough that the credit has been oversold relative to how risky it is, then clearly that’s a buying opportunity."