How does the downgrade affect you?

What happened?

 S&P downgraded South Africa’s sovereign foreign currency credit rating to BB+, below investment grade. Fitch were the second ratings agency to follow suit and announce their decision to downgrade both our local and foreign currency ratings. The third and final rating’s agency has stated that they are putting South Africa on standby for a potential downgrade of our foreign currency rating, but this review could take between 30 and 90 days.

 

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We are currently 2 notches above investment grade with Moody’s, so a single downgrade could still keep the rating in investment grade.

 

South African government bonds are currently included in the World Global Bond Index (WGBI) and this inclusion is based on the local currency rating, not the foreign currency rating. The inclusion in this index is dependent upon the two ratings agencies (S&P and Moody’s), if both of them had to downgrade our local rating to below investment grade, some large offshore investors would be forced to sell our bonds.

 

What does this mean? 

In the short term, the downgrade would see some weakening of the Rand and an increase in bond yields.

For investors with money offshore, this would translate to good Rand returns on those investments. Most

of the shares you are invested in earn a large portion of their income offshore, so there could be some good returns from those shares in the short term.

 

Longer term we are concerned about how investable our market will appear with so much uncertainty, how

sustainable growth is and the negative sentiment this has created for investors. Interest rates and inflation could also edge up. Typically a country which has been downgraded takes a number of years to again be upgraded to investment grade.

 

How should you react?

This downgrade has been expected for quite some time, so while the Rand may weaken on further announcements or the market might get nervous, much of this news has already been priced into the current exchange rate and shares prices, so no drastic emotional decisions and changes should be made.

 

In times like these that we benefit most from our portfolios which have been extensively diversified, to protect us against uncertainty and volatility in the markets.