South African traders waking from their Rugby World Cup party hangover may have another headache to confront: whether to see the Moody’s decision not to cut the country’s credit rating as a trigger to buy or sell the rand.
If you listen to Societe Generale SA, the currency that weakened more than any of its emerging-market peers last week may rally on relief that Africa’s most developed country has retained its last investment-grade rating.
Yet the Paris-based firm and Bank of America also say the new negative outlook on the government’s debt merely delays the inevitable: a downgrade to junk that forces passive funds to sell billions of dollars-worth of rand bonds.
Moody’s Investors Service’s announcement Friday came on the eve of the rugby-obsessed nation’s defeat of England to become world champion.
Now or never
BofA expects the Baa3 rating to be cut after a budget statement in February. If so, South Africa will be excluded from the FTSE World Government Bond Index, triggering as many as $15 billion-worth of outflows from funds that track it, according to Bank of New York Mellon.
“South Africa has been a car crash in slow motion,” said Cristian Maggio, London-based head of emerging-market strategy at TD Securities. “We’re still at a point where that car has not hit that wall, but you can definitely see that’s where they’re going.”
South Africa’s Finance Minister Tito Mboweni said the country needed tough reforms to stall its fiscal deterioration and fix debt-laden state companies such as Eskom..
“It is now or never,” said Mboweni. “Government, labour, business and civil society, we need each other more than ever before.”
Still, Moody’s decision to change South Africa’s outlook but not its rating was what most participants in a Bloomberg survey expected.
Against a global backdrop of negative yields, South Africa’s local-currency bonds “stand out for the still-elevated real rates being offered,” said Phoenix Kalen, an analyst at SocGen in London. “Over a short-time horizon, investors may be tempted into holding South African assets for the carry.”
© 2019 Bloomberg L.P.