If Moody's downgrades the country's rating it means that South African rand bonds will be excluded from the FTSE World Government Bond Index. The gloomiest commentators reckon a sell-off could be as bad as $10 billion worth of outflows, which will cause the rand to weaken to its lowest levels in four years.
Since South Africa relies more on mineral exports, low commodity prices have also led to a weakening of the Rand. Due to low economic growth, China's demand for commodities have gone down resulting in lower global commodity prices. Investor confidence is yet another factor affecting the value of currency.
Moody's Investors Service, (“Moody's”) has today downgraded the Government of South Africa's long-term foreign-currency and local-currency issuer ratings to Ba1 from Baa3. The outlook remains negative. A Ba1 rating is judged to have speculative elements and a significant credit risk.
Based on the credit ratings of two of the big three rating agencies, junk bonds are those with a “Baa” rating or lower from Moody's and a “BBB” rating or lower from S&P. Bonds with a “C” rating carry a higher risk of default, while a “D” rating shows that the bond is in default.
Moody's credit rating for South Africa was last set at Baa3 with negative outlook. Fitch's credit rating for South Africa was last reported at BB+ with negative outlook. This page includes the government debt credit rating for South Africa as reported by major credit rating agencies.
Rating agency Moody's has cut South Africa's sovereign credit rating to subinvestment grade, meaning the country now has a junk rating from all three major international rating agencies. Due to the downgrade, South Africa's government bonds will be excluded from the FTSE World Government Bond Index.
Its investment potential lies in its diversity of sectors and industries. It is also a major trading nation, exporting and importing more than US$167 billion worth of goods every year, from a location that makes it an ideal gateway into African and other global markets.
Brazil was downgraded by Fitch in December 2015, followed by S&P in September 2015 and Moody's in February 2016. The downgrade was driven by an economic recession of -3.8% and the government deficit rising to over 10% of GDP. After the downgrade, the country's government debt to GDP ratio rose by 12% to 77%.
Some of the factors affecting a country's credit rating include political stability, level of national debt, debt maturity, debt interest payments as a percentage of GDP, and growth.
Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides international financial research on bonds issued by commercial and government entities.
When a rating agency raises a bond's rating, this action is called an “upgrade.” Similarly, a lowered rating is called a “downgrade.” Upgrades and downgrades can be key drivers of bond performance.
We have since been downgraded to BB+, which is commonly referred to as 'non-investment grade speculative' or 'junk status'. This rating signals to potential investors that the risk of South Africa's debt has increased because the government might not have enough money to pay back what it borrows.
Moody's Corporation. Moody's Corporation, often referred to as Moody's, is an American business and financial services company. It is the holding company for Moody's Investors Service (MIS), an American credit rating agency, and Moody's Analytics (MA), an American provider of financial analysis software and services.
The company ranks the creditworthiness of borrowers using a standardized ratings scale which measures expected investor loss in the event of default. In Moody's Investors Service's ratings system, securities are assigned a rating from Aaa to C, with Aaa being the highest quality and C the lowest quality.
In other words, BBB is the lowest rating of investment-grade securities, while ratings below "BBB" are considered speculative or junk. Thus for Moody's, a Ba would be a speculative or low-grade rating, while for S&P, a "D" denotes default of junk bond status.
The current status:
On November 1 Moody's kept South Africa's credit rating at their lowest grade rating but downgraded the outlook from stable to negative, which gives the country a period of 18 months to get its act together, so to speak.The downgrading could cause a big sell off in South African bonds and the rand as certain types of investors mandated only to buy high-grade debt are forced to sell. If South Africa's credit rating is downgraded, it will have a negative effect on the currency.
A downgrade is a negative change in the rating of a security. A downgrade of stock would be moving the rating from a buy to a hold, or a hold to a sell. Debt has its rating system as well.
