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Cape Town - More downgrades of South Africa by ratings agencies will certainly not be a train smash, according to David Knee, head of fixed interest at Prudential Asset Management.
He immediately added, however, that more downgrades of SA, especially to junk status, would naturally raise significant concerns, because past examples have shown it could take a long time to turn such a situation around.
Knee spoke on the risk of ratings downgrades and the investment implications thereof at an event hosted by the Actuarial Society of SA at Old Mutual in Cape Town.
In his view South African assets will likely do OK after another ratings downgrade if one looks at examples of certain other comparable countries that had a junk rating in the past and managed to recover. This recovery process could take many years depending on the government’s policy response.
"Examples from equity markets show that it is not necessarily catastrophic when a junk rating is received," he explained.
"Some people say one needs a crisis to be pushed into a corner and forced to make certain tough decisions. Longer-term, though, a junk status story could be quite tough for SA."
Knee further pointed out that SA is not in a unique position as far as ratings downgrades go. Downgrade threats are rising globally and many emerging markets (EMs) have been on a negative outlook since the financial crisis. Nine EMs have a negative outlook with S&P's currently.
"Most countries which are downgraded get it right at some point - this is the good news," said Knee. "It is not a trivial matter for a country to get itself sorted, though."
Already there has been a trend of South African companies taking their money off shore and the 10-year bonds market is already pricing in a one notch downgrade, in his view.
"Yes, the low growth rate is a problem for SA, but there is also a lack of growth and earnings elsewhere in the world," explained Knee.
"If SA is downgraded it could become very unpleasant. Markets are good at anticipating what will happen and pricing it in."
He added that the response to a downgrade would be to expect an outflow of capital and the rand will be very rocky, but emphasised again that there have been examples of countries where this did not happen as a result of a downgrade to junk.
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