What could be the reason for South Africa to be downgraded to junk status?

Ratings agency Moody's moved South Africa to "junk" status on March 27 2020 after revising the outlook on the country's last investment-grade credit rating to "negative" because of a slowdown in economic growth and rising debt burden. Mudiwa Gavaza gives us the breakdown on what it means for SA.

Similarly one may ask, what happens if South Africa is downgraded to junk status?

With the downgrade, the government has to pay more in debt servicing costs, meaning that it will have less to spend on social initiatives and infrastructure. In order to plug the funding gap, government will have to increase revenue through higher taxes. But the effects of junk status don't end at borrowing.

Also, will South Africa get junk status? South Africa officially gets junk status as Moody's cuts. (Bloomberg) – Moody's Investors Service cut South Africa's credit rating below investment grade, delivering the country a full house of junk assessments as it grapples with a nationwide lockdown to curb the spread of the novel coronavirus.

Furthermore, what is a junk status?

Junk status and downgrades are terms that have dominated economics news the past year as the local economy continues to deteriorate and the precarious state of state-owned enterprises is highlighted, almost daily.

What happens when a country's credit rating is downgraded?

A government credit rating downgrade leads to downgrades for corporations. The corporations, faced with increased borrowing costs, will respond by cutting back on new investments, which slows down the real economy. The slowdown in the economy will put more pressure on the government's credit rating.

Related Question Answers

What will happens if Moody downgrades South Africa?

If Moody's downgrades the country's rating it means that South African rand bonds will be excluded from the FTSE World Government Bond Index. The gloomiest commentators reckon a sell-off could be as bad as $10 billion worth of outflows, which will cause the rand to weaken to its lowest levels in four years.

Why is the rand so weak?

Since South Africa relies more on mineral exports, low commodity prices have also led to a weakening of the Rand. Due to low economic growth, China's demand for commodities have gone down resulting in lower global commodity prices. Investor confidence is yet another factor affecting the value of currency.

Did Moody's downgrade South Africa?

Moody's Investors Service, (“Moody's”) has today downgraded the Government of South Africa's long-term foreign-currency and local-currency issuer ratings to Ba1 from Baa3. The outlook remains negative. A Ba1 rating is judged to have speculative elements and a significant credit risk.

What is a junk credit rating?

Based on the credit ratings of two of the big three rating agencies, junk bonds are those with a “Baa” rating or lower from Moody's and a “BBB” rating or lower from S&P. Bonds with a “C” rating carry a higher risk of default, while a “D” rating shows that the bond is in default.

What is South Africa's credit rating?

Moody's credit rating for South Africa was last set at Baa3 with negative outlook. Fitch's credit rating for South Africa was last reported at BB+ with negative outlook. This page includes the government debt credit rating for South Africa as reported by major credit rating agencies.

What is Moodys South Africa?

Rating agency Moody's has cut South Africa's sovereign credit rating to subinvestment grade, meaning the country now has a junk rating from all three major international rating agencies. Due to the downgrade, South Africa's government bonds will be excluded from the FTSE World Government Bond Index.

Why you should invest in South Africa?

Its investment potential lies in its diversity of sectors and industries. It is also a major trading nation, exporting and importing more than US$167 billion worth of goods every year, from a location that makes it an ideal gateway into African and other global markets.

When was Brazil downgraded to junk status?

Brazil was downgraded by Fitch in December 2015, followed by S&P in September 2015 and Moody's in February 2016. The downgrade was driven by an economic recession of -3.8% and the government deficit rising to over 10% of GDP. After the downgrade, the country's government debt to GDP ratio rose by 12% to 77%.

What causes junk status?

Some of the factors affecting a country's credit rating include political stability, level of national debt, debt maturity, debt interest payments as a percentage of GDP, and growth.

What does Moody's do?

Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides international financial research on bonds issued by commercial and government entities.

What does a downgrade in credit rating mean?

When a rating agency raises a bond's rating, this action is called an “upgrade.” Similarly, a lowered rating is called a “downgrade.” Upgrades and downgrades can be key drivers of bond performance.

What does junk status mean for the average South African?

We have since been downgraded to BB+, which is commonly referred to as 'non-investment grade speculative' or 'junk status'. This rating signals to potential investors that the risk of South Africa's debt has increased because the government might not have enough money to pay back what it borrows.

Who is moody?

Moody's Corporation. Moody's Corporation, often referred to as Moody's, is an American business and financial services company. It is the holding company for Moody's Investors Service (MIS), an American credit rating agency, and Moody's Analytics (MA), an American provider of financial analysis software and services.

How does Moody's rating work?

The company ranks the creditworthiness of borrowers using a standardized ratings scale which measures expected investor loss in the event of default. In Moody's Investors Service's ratings system, securities are assigned a rating from Aaa to C, with Aaa being the highest quality and C the lowest quality.

What is junk status credit rating?

In other words, BBB is the lowest rating of investment-grade securities, while ratings below "BBB" are considered speculative or junk. Thus for Moody's, a Ba would be a speculative or low-grade rating, while for S&P, a "D" denotes default of junk bond status.

When was South Africa in junk status?

The current status: On November 1 Moody's kept South Africa's credit rating at their lowest grade rating but downgraded the outlook from stable to negative, which gives the country a period of 18 months to get its act together, so to speak.

What impact will a downgrading of South Africa's credit rating have on its economy?

The downgrading could cause a big sell off in South African bonds and the rand as certain types of investors mandated only to buy high-grade debt are forced to sell. If South Africa's credit rating is downgraded, it will have a negative effect on the currency.

What does it mean when a stock is downgraded?

A downgrade is a negative change in the rating of a security. A downgrade of stock would be moving the rating from a buy to a hold, or a hold to a sell. Debt has its rating system as well.