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Has the downgrade already been priced in?
Chris Holdsworth, investment strategist from Investec Wealth & Investment, explains that Moody’s is unlikely to downgrade South Africa this time around, but could put South Africa on a negative outlook, which would mean a subsequent downgrade if the issues raised are not addressed. Among the most pressing of these is the Eskom crisis.
However, he also points out that bond markets are already pricing South African government bonds at sub-investment grade. “We are priced at worse than Brazil, which is already sub-investment grade,” he says.
It’s a similar picture in the currency market (the rand is weaker against its emerging market peers) and also in the credit default swap (CDS) market, which measures the cost of insuring against default.
A downgrade can be a buying opportunity
This sounds counter-intuitive, but there is some logic to it. Markets tend to price in the downgrade in advance, while the downgrade usually focuses the minds of governments to institute reforms that will address their weaknesses.
We are priced at worse than Brazil, which is already sub-investment grade.
Chris Holdsworth, investment strategist, Investec Wealth & Investment
Do ratings really matter?
Similarly, many corporate bond issuers (including banks) would be affected. The Reserve Bank has been conducting stress tests in this regard.
About the author
Patrick writes and edits content for Investec Wealth & Investment, and Corporate and Institutional Banking, including editing the Daily View, Monthly View and One Magazine - an online publication for Investec's Wealth clients. Patrick was a financial journalist for many years for publications such as Financial Mail, Finweek and Business Report. He holds a BA and a PDM (Bus.Admin.) both from Wits University.
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