March 31

Moody to Downgrade South Africa

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Moody to Downgrade South Africa

In today’s volatile markets, there is no shortage of financial commentators who are quick to respond to current events and to offer their short-term expectations. But most investors typically have long-term exposures to debt with maturities from several years to more than a century, while borrowers hope to maintain access to capital market funding for many years beyond the latest issue.

So along come credit agencies that rate the potential risk typically for companies and individuals but also for countries in order for that country to attract foreign investment. This rate determines the country’s ability to pay back debt and interest payments and the likelihood of potential defaults.

Credit rating agencies are different than credit reporting bureaus. Credit ratings assess a country’s ability to repay a loan, whereas credit reporting determines an individual’s credit score.

Moody’s is one of the 3 major credit agencies (Fitch and Standard & Poor being the other two) that offer these ratings, typically focusing on the fundamental factors that will drive each county’s ability and willingness to meet its credit obligations over the long term. The other two agencies had already rated South Africa as high risk. Moody’s is the last to downgrade South Africa to what is termed as junk status, officially a rate leveled at BA1, one level below investment grade.

The positive side to credit rating means a lower cost of borrowing for a country. Individuals will obtain a lower interest rate on fixed deposits, debentures, and debt. The term “junk” is very colloquial, but it describes a country that has dropped below an acceptable investment grade in the rating agency’s eyes. Moody’s will measure the health of the economy and the government’s ability to honour its debt.

South Africans could face this possibility. This might mean many people will be encouraged to reduce expenses and cut back on luxury expenditure. The foreign exchange rate will see a drop-in value to foreign currencies, but the time frame for the currency to recover is unknown. This means time for the currency to recover before the funds being released abroad “junk” status or the more acceptable term, “Non-investment status” indicates the country will hold off on interest rate cuts, and obtaining further loans could be more restrictive.

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