Here’s how much a downgrade to junk will cost South Africa
What’s the cost of becoming junk? South Africa will soon find out.
The country lost its last investment-grade rating late on Friday when Moody’s Investors Service cut it to Ba1, citing a weak economy and an unreliable power sector.
When markets re-opened on Monday in Asia, the effect was immediate. The rand fell to a record low, weakening beyond 18 per dollar for the first time, before paring losses. The government’s local-currency debt and Eurobonds, as well as banking stocks, also dropped. The rand weakened 0.1% to 17.93 against the dollar as of 06:45 in Johannesburg on Tuesday, extending its decline this year to 22%.
There could be more to come. The downgrade will trigger South Africa’s exclusion, probably around late April, from the FTSE World Government Bond Index. The gauge includes 14 currencies, including the dollar, yen and euro, and is tracked by around $3 trillion of funds.
Passive funds following the WGBI will have to dump rand bonds once they’re excluded. South Africa has a 0.45% weighting in the main index, suggesting there could be roughly $14 billion of passive money holding rand government bonds. But it’s impossible to tell accurately since funds can be under- or overweight South Africa, which is the highest-yielding member of the WGBI.
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