South Africa downgraded to junk status and Rand hits its weakest ever

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The downgrade will result in the removal of South Africa from the World Government Bond Index (WGBI). It is a requirement of the WGBI to be rated investment grade by at least one of the three rating agencies. South Africa was downgraded by S&P and Fitch in 2017. 

What does junk status mean for the country?

Since all three rating agencies have downgraded South Africa to junk status, global investors that track this index will be forced to sell South African exposure. This will result in a mass outflow of capital of up to $12 billion according to analysts. Fortunately, for now, South Africa will remain on the index until the end of April. This decision was made due to the increased volatility and unnatural liquidity challenges. 

Cyril Ramaphosa addressed the nation on Monday night. He stated that the downgrade to junk status would increase the cost of capital and that the economy would be negatively impacted. The decision to downgrade came at a horrible time as South Africa is currently undergoing its fifth day of a 21-day lockdown amid the COVID-19 pandemic. 

The Rand hit its weakest level ever, trading at R18.05 to the Greenback in the early hours of Monday morning. 

Market event calendar

Tuesday 31 March

• South Africa balance of trade for February: Expected at R-5 billion

Wednesday 1 April

• Japan Tankan large manufacturers index Q1: Expected at -12
• China Caixin manufacturing PMI for March: Expected at 45.7

Thursday 2 April

• US balance of trade for February: Expected at $-39 billion

Friday 3 April

• US non-farm payrolls: Expected at -150,000