Possible credit downgrade already priced in markets

Pretoria – To the extent that a ratings downgrade has been priced in financial markets, the effect will not be as harsh.

This was alluded to by Reserve Bank governor Lesteja Kganyago, who was speaking at the Monetary Policy Committee’s (MPC) rates announcement held at the South African Reserve Bank (Sarb) in Pretoria.

The reserve bank decided to keep the repo rate unchanged at 7%.

During a question and answer session with media, Kganyago said that the circumstances in South Africa are different to the last time ratings agencies visited.

Last time they decided to keep ratings unchanged. “Be that as it may, ratings decisions are taken by ratings committees. We shall await what ratings committees decide to the extent that the possibility of a downgrade is factored in current financial market prices,” he said.

“If the financial markets have priced in a downgrade and it does not take place, we expect a positive repricing in financial markets as well,” he added. However he said it was difficult to tell the extent to which pricing has been worked in.

“There are players who take a view that there is going to be a downgrade. And there are players who believe there won’t be a downgrade. That is the beauty of an efficiently functioning market,” he said. Views that contest wrongly pay a price for getting things wrong, whereas those who get things right are rewarded, he added.

In South Africa the local currency rating is higher than the foreign currency rating. For the purposes of the domestic bond market, what matters is the domestic currency rating, he said. Even if there is a downgrade in local currency, it will not result in a drop below investment grade.

Daniel Mminele, deputy governor, explained that the Sarb will meet with ratings agencies.

“We will give an update on the domestic economic situation,” he said. From there the committees will take the information and process it and then share the results of the evaluation. “The conversations happen in an orderly manner… It is difficult to discern from those conversations what the decision may be,” he added.

Moody’s rating decision

Old Mutual Investment Group chief economist, Rian le Roux, said that a possible downgrade by Moody’s on Friday 25 November, would not come as a “major surprise”. It will not pose a “big risk” to the market, as a downgrade by Standard and Poor’s (S&P) would.

The credit rating by Moody’s is currently two notches above junk status however that of S&P is one notch above sub-investment grade.

“If Moody’s does decide to downgrade South Africa’s credit rating, it would simply align their rating with that of S&P and Fitch,” said le Roux in a statement.

If Moody’s does not downgrade it would be important to see if the ratings agency changes their putlook from negative to stable. “A stable outlook would indicate little to no intention to downgrade to junk any time soon, which will be viewed in a positive light by investors,” he explained.

Le Roux believes S&P could downgrade South Africa’s local rating, however he does not believe they will downgrade the sovereign rating.  

 “If S&P does leave our rating unchanged, this will buy South Africa little more time to get its house in order,” he said.