South Africa: Moody’s and S&P rating review in progress - TDS

Analysts at TDS suggest that today, Moody’s and S&P will review their sovereign ratings for South Africa and their respective FC ratings are Baa3 (negative) and BB+ (negative), but the focus of the market’s attention will be on the LC ratings, which are currently both investment grade, namely Baa3 and BBB-. (Fitch has both FC and LC ratings at BB+).

Key Quotes

“What is at stake here is the inclusion of SAGBs in commonly tracked EM bond indices. Citi’s WGBI requires both S&P and Moody’s assigning IG to South Africa’s LC debt rating. Other indices may require any two agencies between S&P, Moody’s and Fitch to assign an IG rating to the LC debt. The worst case scenario is a simultaneous downgrade of South Africa’s LC debt ratings by both S&P and Moody’s, leading to selling by indexers, but fortunately we think this is a low 10% probability scenario.”

“Downgrade of the LC rating by either S&P or Moody’s, but not both, has a 40% probability.  And the best outcome, no ratings changes at all, has a 45%.probability. We think there is a small, 5% chance that, Moody’s cuts its FC rating but not the LC rating, while S&P does nothing at all. We think  that the market remains too complacent ahead of the event, but that said, the ZAR correction would likely be small at around 1-3% given the distribution of probabilities, and could offer an opportunity to reposition for the greater gains we forecast in 2018.”