Markets Are Taking Moody's S. Africa Rating Review in Stride

(Bloomberg) -- It’s a rating decision that could trigger as much as $6 billion of capital outflows from Africa’s most industrialized economy. Investors aren’t batting an eyelid.

South Africa will probably escape a junk assessment from Moody’s Investors Service on Friday, according to 15 economists surveyed by Bloomberg. A downgrade of the country’s local-currency debt would see the nation’s securities exit CitiGroup Inc.’s World Government Bond Index, leading to forced selling of government notes by funds that track the gauge.

Traders don’t see much prospect of that, options pricing shows. While the rand’s one-week implied volatility versus the dollar has edged up in recent days, it’s still well below the long-term average. The currency gained 0.2 percent to 11.8299 per dollar by 9:02 a.m. in Johannesburg, bringing its advance since Moody’s placed South Africa on credit-watch negative in November to 20 percent.

Markets Are Taking Moody's S. Africa Rating Review in Stride

Here’s what investors and analysts are saying about market reaction to the rating review.

Toronto-Dominion Bank

  • Rand may weaken as much as 3 percent in the event of a downgrade, says Cristian Maggio, head of emerging-market strategy; may strengthen as much as 1 percent from current levels on a decision to hold
    • 10y rand swaps to move up 15-20 basis points on a downgrade, and fall five basis points on no change
    • Sees rand at 11.60 per dollar by year-end and 11.50 in 2019
    • Sees South Africa yield curve dropping 30 to 40 basis points over next two years
  • “If they do hold, then I would also expect Moody’s to change the credit watch negative into a negative outlook, which represents a marginally ameliorated situation”


  • The government under the new leadership of Cyril Ramaphosa has improved the political and economic outlook, lessening the chances of a downgrade, economist Elisabeth Andreae wrote in a note to clients
  • But risks remain, including a still-large budget shortfall, talk of nationalizing the South African central bank and uncertainty around land reform
  • “In the medium term, as with other emerging market currencies, the rand’s performance is likely to be determined largely by global factors. In addition to potential global risk-off movements, the Fed’s upcoming rate hikes and continuing dollar weakness should pose the greatest risks to the rand”
  • “We therefore remain cautious about rand exchange rates and have penciled in a moderate depreciation of the South African currency”
    • Sees rand at 12.80 by end-2018 and 13.50 by end-2019

Standard Bank

  • “No change in any rating-agency stance. An upgrade by the others is not an easy path and will take at least 18-36 months of solid economic data for a turn around,” said Warrick Butler, a Johannesburg-based currency trader at Standard Bank
  • “The rand is still following the global dollar story. It may be worth a few cents of strength but the market expectations are for a hold anyway”


  • “Moody’s will give South Africa the benefit of the doubt even though it is difficult to quantify politics in their model,” said Mehul Daya, a technical strategy analyst at Nedbank
  • Global issues will dictate where the rand goes next even as local developments remain supportive to the currency

Afrifocus Securities

  • Market consensus is for no rating change; an unexpected downgrade would dim positive sentiment for Johannesburg-listed stocks, said Ferdi Heyneke, a portfolio manager at Afrifocus
  • “If there is no downgrade, South Africa-focused stocks will just keep their steadiness going and then it will be dependent on what happens in the world market”
  • “That may have been priced in to an extent already”
Markets Are Taking Moody's S. Africa Rating Review in Stride

Independent Securities

  • Downgrade would be “negative for the SA Inc. stocks, particularly the banks and possibly the retailers as well, anything that is South African focused,” said Michele Santangelo, a portfolio manager at Independent Securities
  • “It will probably be positive for the rand hedges particularly because we might see some weakness on the rand on that announcement”
  • “A lot of the stocks and the rand are pretty priced in that Moody’s will not downgrade us”
  • Could see further rand strength to recent highs of 11.50 per dollar
  • Financial stocks may rally

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