Moody’s decides: Has a downgrade to junk already been priced in?

Chris Holdsworth, investment strategist at Investec Wealth & Investment, discusses the Moody’s statement on South Africa’s credit rating that is due to be released on 29 March.

Historically, downgrades have proven to be a buying opportunity as markets tend to price in the downgrade in advance. Downgrades also usually focus the minds of governments to institute required reforms.

Moody’s is the only rating agency that has not downgraded South Africa to sub-investment grade; so a downgrade could affect South Africa’s inclusion in a number of global bond funds and indices.

Moody’s is unlikely to downgrade South Africa this time around, but could put South Africa on a negative outlook, which would mean a subsequent downgrade if the issues raised are not addressed. Among the most pressing of these is the Eskom crisis.

However, he also points out that bond markets are already pricing South African government bonds at sub-investment grade. We are priced at worse than Brazil, which is already sub-investment grade.

It’s a similar picture in the currency market (the rand is weaker against its emerging market peers) and also in the credit default swap (CDS) market, which measures the cost of insuring against default.

A downgrade can be a buying opportunity

If a downgrade does happen, it’s not all bad news. Based on analysis of sovereign downgrades over the years, the actual downgrade has been a buying opportunity: credit default swap spreads typically come down over the subsequent six months.

This sounds counter-intuitive, but there is some logic to it. Markets tend to price in the downgrade in advance, while the downgrade usually focuses the minds of governments to institute reforms that will address their weaknesses. 

Do ratings really matter?

Given the above, one has to ask: do ratings really matter? They do, simply because a number of global bond indices (which are tracked by passive funds) require a country to have an investment grade rating to be included, while many actively managed funds only invest in investment grade bonds, which indicates there would in all likelihood be an outflow in the event of a downgrade.

Similarly, many corporate bond issuers (including banks) would be affected. The Reserve Bank has been conducting stress tests in this regard.


Related Content

Locust plague, COVID-19 weigh on East Africa’s economic outlook

The World Bank recently announced the first phase of an additional $500 million package to combat the locust invasion in East Africa and the Middle East. According to Moody's, though crucial, the support package pales in comparison with the magnitude of the twin shocks that the East African economies face from the pandemic and the locust invasion. Kelvin Dalrymple, vice-President and Sovereign Analyst at Moody’s joins CNBC Africa for more.

Moody’s: Tanzania’s monetary policy to support banks’ liquidity

According to a Moody's report, measures taken by Tanzania's Central Bank will support the market-funded banks in meeting their funding and liquidity needs amid the Covid-19 pandemic. However, these measures are not enough to prevent a decline in bank asset quality. Peter Mushangwe, Banking Analyst at Moody’s joins CNBC Africa for more.

Moody’s changes Ghana’s outlook to negative, B3 rating affirmed

Moody's Investors Service has affirmed the Government of Ghana's long-term local and foreign currency issuer and foreign currency senior unsecured bond ratings at B3 and changed the outlook to negative from positive. Derrick Mensah, Portfolio Manager at IC Asset Managers joins CNBC Africa for more.

Moody’s affirms Nigeria’s B2 ratings, maintains negative outlook

Moody’s says the rapid and widening spread of the coronavirus outbreak and related oil price shocks are creating an unprecedented credit shock across a wide range of regions and markets adding that for Nigeria, these shocks has amplified existing credit vulnerabilities both over the immediate and longer term. Aurelien Mali, Vice President and Sovereign Analyst at Moody’s joins CNBC Africa for more.

Subscribe to our newsletter

Sign up for free newsletters and get more CNBC AFRICA delivered to your inbox

More from CNBC Africa

Pirates kidnap nine in attack on vessel off Nigeria, says ship owner

OSLO (Reuters) - Pirates attacked an oil production vessel off Nigeria in the early hours of Thursday and kidnapped nine Nigerian nationals,...

Coke The Secret Formula EP2: Highlights Special

In this second episode Asanda travels to the Kingdom of Eswatini to investigate what Project Last Mile is doing to help educate young girls and women about their personal health, HIV and teenage pregnancy. It's a poignant journey into the soul of a kingdom striving to fight new infections and deal with health issues head on....

Tesla stock hits record high and smashes Wall Street expectations: CNBC After Hours

CNBC.com's MacKenzie Sigalos brings you the day's top business news headlines. On today's show, CNBC's Phil Lebeau breaks down the latest delivery numbers from Tesla and outlines the company's monster week on Wall Street. Also, CNBC's Meg Tirrell dig

South Africa records first current account surplus in 17 years

JOHANNESBURG (Reuters) - South Africa recorded its first current account surplus in 17 years in the first quarter of 2020 as the...

Partner Content

Sanlam launches urgent job-preservation initiative in response to COVID-19

Sanlam Investments is responding to the COVID-19 pandemic through large-scale support of the recovery of South African companies, from small enterprises to...

Is Market Volatility Here For The Foreseeable Future?

Content provided by CompareForexBrokers Prior to understanding why market volatility might be here to stay for the foreseeable future,...

Trending Now

South African rand opens stronger after positive data

JOHANNESBURG (Reuters) - South Africa’s rand opened stronger on Friday and was on course for gains of roughly 2% against the dollar...

Why Africa’s next generation of writers should embrace digital publishing

Are Africa’s literary traditions on the wane? Or are we not notiving this generation’s breed of Wole Soyinka and Chinua Achebes? CNBC Africa’s Arnold Kwizera spoke to Comic Republic’s Jide Martin on the future of the industry.

East African Breweries CEO shares how the company is responding to the COVID-19 challenges

The brewing industry has always attracted double digit growth due to the demand of beer, wine and other spirit drinks. The Covid-19 pandemic has however dealt a hard blow to the industry, with bars and pubs forced to close as part of the measures to curb the spread of the disease. Andrew Cowan, Group Managing Director and CEO, East African Breweries Limited joins CNBC Africa for more.

How businesses in East Africa can adapt and built resilience in the face of COVID-19

COVID-19 has had a significant economic impact across East Africa, from macro to consumer-level. Global shocks and local restrictions aimed at curbing the virus spread have severely impacted businesses across sectors but how can they bounce back? CNBC Africa’s Arnold Kwizera spoke to Mills Schenck, Managing Director and Partner at the BCG Nairobi for more.
- Advertisement -