This week could see R100 billion flow out of South Africa because of the “junk” status of the country’s debt.
The rand could well weaken to about R19.50 against the dollar, and further downgrades in the future aren’t out of the question, say analysts.
Credit ratings agency Moody’s Investors Service’s downgrade of the country’s sovereign debt at the end of March finally dumped the nation into full junk status.
This week, S&P Global downgraded our foreign and domestic state debt deeper into junk status and said that, although the country had done well to combat the Covid-19 coronavirus from a medical point of view, it would be difficult to handle the long-term economic fallout of the five-week lockdown.
This was because South Africa was in a weak economic position even before the lockdown, it said.
Government announced a stimulus package of R500 billion to handle the crisis and will have to borrow much of it, including through the issuing of bonds to foreign investors.
“VARIOUS INSTITUTIONAL INVESTORS SUCH AS PENSION FUNDS, EXCHANGE-TRADED FUNDS AND FUNDS THAT FOLLOW SPECIFIC INDICES ARE NOT ALLOWED TO INVEST IN BONDS THAT ARE BELOW INVESTMENT GRADE”
Junk status means that South Africa’s government bonds on Thursday dropped out of the FTSE World Government Bond Index (WGBI).
Various institutional investors such as pension funds, exchange-traded funds and funds that follow specific indices are not allowed to invest in bonds that are below investment grade.
To date, it’s been estimated that these investors will therefore have to get rid of between R30 billion and R100 billion in bonds, said George Herman, investment head at Citadel.
Many people think investors started dropping the bonds since the Moody’s announcement on March 27, but, according to Herman, these have really been discretionary investors and hedge funds – money that flows quickly in and out – who got rid of all high-risk assets.