Downgrades lift financing costs
conference in December.
In the event that all three agencies cut South Africa’s sovereign rating by one notch it would mean that “the approximately R120 billion of net issuance planned by the government for next year would cost, over the lifetime of the bonds, about R2bn more than would have been the case in the absence of the downgrade”.
The additional costs will be met by taxpayers.
Investec capital market economist Tertia Jacobs said yields on South Africa’s international bonds had not responded yesterday to the batch of downgrades. And the cost of insuring debt through credit default swaps had not reacted.
Jacobs noted that Moody’s rating had been one notch ahead of the other agencies and the sovereign rating was now in line with the others.
Nedbank Capital strategic analyst Mohammed Nalla said governance issues would “differentiate different municipalities”. Moreover, the linkages between the sovereign and the municipalities differed.
Nalla said the transmission effect from market rates to the Reserve Bank’s official repo rate was not clear but there could be some spillover.
The sovereign premium would also be applied to corporates listed on the JSE but the impact would vary depending on the extent to which their operations were diversified internationally, Nalla added.
Marcus said R84bn had been placed by non-residents in the local bond market this year. Although the flows would not continue at the same pace they would not dry up. She said global institutional investors would continue to turn to emerging markets to earn worthwhile returns.
After a poor performance on Friday, foreign bond inflows lifted on Monday with purchases of nearly R6bn, Citi strategist Leon Myburgh said. This followed South Africa’s inclusion in the Citi World Government Bond index that day.