Business Maverick: Here’s How Much a Downgrade to Junk Will Cost South Africa By Bloomberg
Africa’s most industrialized nation lost its last investment-level rating late on Friday when Moody’s Investors Service downgraded it to Ba1, citing a weak economy and an unreliable power sector., weakening beyond 18 per dollar for the first time. The government’s local-currency debt and Eurobonds, as well as banking stocks, also dropped.
There could be more to come. The downgrade will trigger South Africa’s exclusion, probably around late April, from the FTSE World Government Bond Index. The gauge includes 14 currencies, including the dollar, yen and euro, and is tracked by around $3 trillion of funds. Passive funds following the WGBI will have to dump rand bonds once they’re excluded. South Africa has a 0.45% weighting in the main index, suggesting there could be roughly $14 billion of passive money holding rand government bonds. But it’s impossible to tell accurately since funds can be under- or overweight South Africa, which is the highest-yielding member of the WGBI.
in the secondary market for the first time. The effect of the operation will be “to print money and expand the money supply,” they said.Outflows could total anywhere between $4 billion and $10 billion, according to Geoff Kendrick, London-based head of emerging-market currency research at Standard Chartered. But further rand losses will be limited, he said, recommending that clients sell the dollar if the exchange rate gets to 19.
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