Johannesburg - An expected cut in South Africa's credit ratings to "junk" grade is already being priced in by investors who are increasingly shunning the country's financial assets.
Africa's most industrialised economy is seen at risk of losing its investment-grade status because of persistently weak growth and large deficits. Many investors are also unhappy with President Jacob Zuma's handling of the economy.
A change in ratings to speculative grade, known as "junk", typically leads to a sharp rise in borrowing costs. That would be bad news for South Africa, whose debt servicing needs are already projected by the Treasury to rise to nearly R180bn ($12 billion) in 2018-19.
But South African dollar debt trading in JP Morgan's Emerging Markets Bond Index is already yielding more than that of countries with similar credit ratings, such as Romania or India, and even some lower-rated peers like Russia and Turkey.
"A lot of things that people say would happen if we are downgraded, have already happened," NKC African Economics analyst Francois Conradie said. "A lot of capital left the country in the second half of last year, especially in December."
"Even at investment-grade we are already paying as much as other countries that are sub-investment grade - it's like we have already been downgraded."
South African bonds in the EMBI Global index were trading at a premium of 410 basis points over U.S. Treasuries on Friday, while Russian bonds traded at just 274 basis points.
The cost of insuring South Africa's debt against default has also leapt, with its five-year credit default swaps trading at 318 bps on Friday, according to Markit, versus 289 bps for Russia and 258 bps for Turkey.
Rating agency Moody's placed South Africa on review on Tuesday, saying it was concerned about Pretoria's ability to restore fiscal strength and boost growth.
Moody's, which has assigned South Africa investment-grade status since it began rating the country in 1994, currently rates the sovereign Baa2, two notches above junk and slightly higher than the BB- ratings of Standard & Poor's and Fitch.
Yields on the benchmark domestic government bond have jumped as much as 62 basis points since early December, when Zuma alarmed investors by changing finance ministers twice in a week, while the rand has fallen nearly 5% against the dollar.
The economy is forecast to expand just 0.9% in 2016 while the country has large budget and current account deficits which it has relied on foreign investors to finance.
But sentiment towards South Africa has deteriorated since Zuma's sudden switch of finance ministers in December.
That same week, foreign investors sold a net R5.6bn of South African shares, according to data from the JSE.
JSE data also shows foreign investors sold a net R965m rand of stocks last year after buying a net R13bn rand in 2014. While they were net buyers of the country's bonds to the tune of R778.5m, that was much less than the R2.9bn they bought in the previous year.
Business confidence among local investors has meanwhile fallen to a five-year low.
Markets have calmed since Pravin Gordhan, respected for a previous stint at the ministry, was appointed as finance minister but any rating cut is still likely to trigger a further sell-off in South African assets.
"Even if markets expected (the downgrade), some forced selling from funds and investment managers would ensure some degree of volatility," IGM analyst Christopher Shiells said.