SA could lose up to R100bn

THIS week could see R100 billion fl ow out of South Africa because of the “junk” status of the country’s debt. The rand could well weaken to about R19.50 against the dollar, and further downgrades in the future aren’t out of the question, say analysts.

Credit ratings agency Moody’s Investors Service’s downgrade of the country’s sovereign debt at the end of March finally dumped the nation into full junk status. This week, S&P Global downgraded our foreign and domestic state debt deeper into junk status and said that, although the country had done well to combat the Covid-19 coronavirus from a medical point of view, it would be difficult to handle the long-term economic fallout of the five-week lockdown.

This was because South Africa was in a weak economic position even before the lockdown, it said. Government announced a stimulus package of R500 billion to handle the crisis and will have to borrow much of it, including through the issuing of bonds to foreign investors. Junk status means that South Africa’s government bonds last Thursday dropped out of the FTSE World Government Bond Index (WGBI).

Various institutional investors such as pension funds, exchange-traded funds and funds that follow specific indices are not allowed to invest in bonds that are below investment grade. To date, it’s been estimated that these investors will therefore have to get rid of between R30 billion and R100 billion in bonds, said George Herman, investment head at Citadel. Many people think investors started dropping the bonds since the Moody’s announcement on March 27, but, according to Herman, these have really been discretionary investors and hedge funds — money that flows quickly in and out —who got rid of all high-risk assets.

Between April 22 and 24, when the WGBI was rebalanced, foreigners only sold about R12 billion of South African government bonds. Herman expects institutional investors to get rid of their holdings this week, which could lead to as much as R100 billion flooding out of the country and giving the rand a pounding. He predicts a weakening of the rand to about R19.50 to the dollar. At one point on Wednesday, it was still trading at R18.11. Herman thinks institutional investors were slow to react because they didn’t know what country’s government bonds would replace South Africa’s. Now that they know it is Israel, they are expected to start selling this week. Nolan Wapenaar, a fund manager at Anchor Capital, is of the opinion that a good deal of the money has already left the country. In the six months between the announcement that South African bonds would become part of the WGBI and the bonds finally being taken up, investors increased their exposure to South African government bonds very gradually. — City Press