Judging by the foreign outflows from South African stocks, equity investors may already be positioned for a downgrade from Moody’s Investors Service that will cost the country its final investment-grade rating.
Johannesburg’s stock exchange has experienced 90 billion rand ($6 billion) of outflows this year, Leila Fourie, chief executive officer of bourse operator JSE Ltd., said in an interview in New York Thursday. That suggests a Moody’s downgrade is already largely priced in, she said.
Moody’s, which rates South Africa Baa3, one step above speculative grade, cut its outlook to negative on Nov. 1. That followed Finance Minister Tito Mboweni’s budget statement, which showed the government’s financial situation deteriorating rapidly.
Most of the discussion around the impact of such a move has been around bonds, with a downgrade prompting rand debt to be excluded from the FTSE World Government Bond Indexes, which have about $3 trillion tracking them, according to Bank of New York Mellon. South Africa has a 0.45% weighting in the main index. Estimates from analysts about the magnitude of the outflows are as high as more than $10 billion.
A downgrade may alter the profile of investors buying South African assets, Fourie said.
“It will change the type of investor from a buy-to-hold, pension fund-type investor to a more speculative, hedge fund-type investor,” Fourie said. “If hedge funds are investing, they are more volatile and will create more volatility on the market, which might be good for liquidity, but not necessarily good in a situation of a severe downturn.”
Moody’s gave South Africa three months to get its finances in order, saying it will be looking for a “credible fiscal strategy” to contain rising debt in the budget review due February.
“Insofar as business impact goes, the obvious potential negative downside of a downgrade is that some of the large corporates may have their ratings downgraded to sub-investment in order not to pierce the sovereign ceiling,” Fourie said. “If that happens, it will create a structurally less profitable market for those companies seeking to raise funds in the market because of their lower rating.”
South Africa’s benchmark stock index has climbed 6.9% this year, compared with the 8.6% gain in the MSCI Emerging Markets Index. Foreigners were net sellers of 335 million rand of South African stocks Thursday, marking a seventh consecutive day of outflows.
©2019 Bloomberg L.P.
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