SA's $14bn question as junk downgrade looms

New York - Wall Street and other global banks say it’s a question of when, not if, South Africa loses investment grade status on its local-currency ratings. The bigger question is how much damage that would cause.

Bank of America estimates there may be $14bn of outflows if rand debt is excluded from Citigroup’s World Government Bond Index, which requires non-junk ratings from Moody’s Investors Service and S&P Global Ratings.

That moment may be fast approaching after Finance Minister Malusi Gigaba’s bleak mini budget speech on October 25 forecast rising debts and weaker growth. JPMorgan Chase & Co analysts Sonja Keller and Yvette Babb said ratings companies "are now unlikely to remain as patient as they had been".

They predict Moody’s and S&P - each scheduled to review South Africa on November 24 - will probably cut the nation’s local bonds below investment grade within two months. If so, they would follow Fitch Ratings, which already has South African debt at junk.

Standard Chartered says it’s possible that almost $10bn, or about one-fifth of foreign debt holdings, will leave South Africa if it’s kicked out the WGBI and the Bloomberg Barclays Global Aggregate Index. Still, it’s complicated by the lack of transparency over how many funds track the indexes and whether some investors would see rising yields as an opportunity to buy.

“There is no consensus on the magnitude of forced selling on potential bond index exclusion,” Samir Gadio, head of Africa strategy at Standard Chartered, said in a note Monday.

“Although passive offshore investors tracking both indexes would exit the market, such outflows may be partly mitigated by a reallocation of South Africa government bond holdings from investment grade to non-investment grade funds in active investors’ portfolios.”