JSE's Leila Fourie: Junk status unfortunate but not unexpected

Markets are more likely to be punctuated by Covid-19 news flow, Leila said.

On 27 March, Moody’s downgraded South Africa’s credit rating to ‘junk’, making South Africa’s debt rating below investment grade by all three major rating agencies, the other two being Standard & Poor’s and Fitch. This came only a day after South Africa went into a 21-day lockdown due to the Covid-19 spread.

Johannesburg Stock Exchange (JSE) group CEO Leila Fourie said that while it is unfortunate, it was not unexpected. She said that the biggest impact of the downgrade would be in the bond market as South African government bonds will fall out of the FTSE World Government Bond Index.

“While index exclusion is likely to force outflows from passive funds in the coming weeks, some active managers could pick up the slack, limiting some of the net market fallout,” Leila added. “The world capital markets are efficient, and they have already priced in the sub-investment grade risk that South Africa reflects, which is a slight relief. In fact, I believe we could see a partial bounce back after an initial negative reaction settle.”

She also cautioned that markets are more likely to be “punctuated by Covid-19 news flow, saying that markets and people are not reacting the way they might have in the past because of the sense of panic and uncertainty. 

“During a time of crisis, the information value from ratings agencies can be drowned out by other factors influencing market movements. In fact, right now Covid-19 and the epidemiological forecasts outweigh Moody’s agency downgrade as they are better predictors of government action and economic growth.”

In Moody’s statement, the rating agency noted that South Africa’s “continued deterioration in fiscal strength and structurally weak economic growth” supported its decision to downgrade. 
 
 “Junk status will have major implications for us as a country and could fast-track structural reform in the country, accompanied by tectonic political and economic shifts,” Leila said. “There’s no doubt that navigating through this will require incredible courage and resolution, but South Africa is renowned for just that; achieving it in 1994 and again in 2018.”
 
With regard to the impact on the real economy, “There is no doubt that the downgrade will impact the cost of capital of our banks too, who won’t be able to pierce the sovereign ceiling so the cost of borrowing for South Africans is going to increase.”
 
“In President Cyril Ramaphosa, the country has a leader whose management of the current global health crisis, should fill everyone with immense confidence,” Leila concluded.