If Moody’s Investors Service cuts South Africa’s credit rating to junk, the subsequent bond sell-off could be as little as $1 billion to $1.5 billion because investors have already started positioning for the risk, according to Bank of America Corp.
The lender’s view contrasts with that of the South African Reserve Bank, with deputy governor Kuben Naidoo saying this week that between $5 billion and $8 billion could leave.
While as much as $9 billion was initially at risk, “the downgrade story has manifested itself in outflows” already, David Hauner, London-based head of Eastern Europe, Middle East and Africa cross-asset strategy at Bank of America, told reporters in Johannesburg on Friday.
Foreign investors have been net sellers of $6.5 billion of South African local-currency government bonds since the beginning of 2018, according to data compiled by Bloomberg.
Moody’s this month cut its outlook on South Africa’s rating to negative, meaning the next move could be a reduction to junk because its current assessment is the lowest investment grade. Like the other two major ratings companies, it’s concerned by deteriorating government finances and the indebtedness of state-owned companies such as Eskom Holdings SOC Ltdm which owes creditors about $30 billion. S&P Global Ratings and Fitch Ratings reduced the country to junk two years ago.