The difference between the foreign currency rating and the local currency rating

In the wake of the recent S&P downgrade, the economic landscape in South Africa is murky, with the South African rand teetering on the brink of losing its investment grade status. The difference between foreign currency ratings and local currency ratings has become a hot topic of discussion, as investors and policymakers scramble to understand the implications of the downgrade. Lesiba Mothata, Chief Economist at Investment Solutions, shed some light on this complex issue in a recent interview on CNBC Africa. Mothata explained that when the South African National Treasury issues debt, it does so in both local currency (the rand) and foreign currency (mainly US dollars). The majority of the debt issued by the treasury is in local currency, with only a small portion in foreign currency. This distinction is crucial, as the ratings assigned to each type of debt have different implications for the country's economic stability. The recent downgrade by S&P has put the local currency rating at risk, with Mothata warning that a further downgrade could spell 'Armageddon' for the South African economy. He emphasized the importance of maintaining the country's investment grade status in local currency, as it is the foundation for many investment strategies and portfolios. Key Points: 1. Local Currency Rating vs. Foreign Currency Rating: The majority of South Africa's debt is denominated in local currency, making the local currency rating more significant for investors. A downgrade in the local currency rating could have dire consequences for the economy. 2. Leadership and Tough Decisions: Mothata highlighted the need for strong leadership and tough policy decisions to steer the country out of its current economic crisis. Drawing from the experiences of other emerging markets, he stressed the importance of swift action and decisive measures to restore investor confidence. 3. The Role of the Finance Minister: Mothata expressed cautious optimism about Finance Minister Malusi Gigaba's ability to navigate the economic challenges facing South Africa. He urged Gigaba to engage with market players, implement sound policy decisions, and prioritize the economy over political considerations. In the midst of uncertainty and growing concerns about the country's economic future, Mothata's insights offer a glimmer of hope. By staying true to sound economic principles, making tough decisions, and rallying behind a common vision, South Africa may yet weather the storm and emerge stronger on the other side.