Junk status is a challenge we need to rise to

JOHANNESBURG – South Africa will start to feel the impact of Friday’s decision by Moody’s to downgrade the country to junk status as an investment destination from today.

There’s no doubt that our bond market will be affected; South African government bonds will fall out of the FTSE World Government Bond Index after the rebalancing next month, which is likely to lead to capital outflows. Foreign investors might change the way they invest in our market. We might begin to see fewer foreign pension funds investing for the longer term as they used to.

They might be replaced by speculative, shorter-term “hot money” dipping in and out over shorter terms driven by the relative investor appeal of higher yields in developing markets, such as ours.

But will they? That was the old wisdom before the outbreak of the novel coronavirus. It’s uncanny that I did my PhD thesis in 2014 on the effects of an economic contagion – also emanating from China – and we now have a global health crisis that is changing how we think and how we act.

Markets and people are panicking as Covid-19 translates into complexity and the fundamentals turn counter-intuitive, creating even more volatility both in South Africa and across the globe. The upside to this is that the information value from ratings agencies is offset by the overarching Covid-19 crisis, forcing investors to turn to better predictors of government action and future economic growth.