Much has been made of this possibility in recent months. It is expected that ratings agency Standard & Poor’s is the most likely to lead the way on this – either as early as next month or in December.
Whist there is a school of thought which says markets have already priced in the possibility of such a downgrade and that generally there has been an over-reaction to the negative effects of such a move, there is still the possibility that should this happen, there will be a withdrawal of funds from South Africa coupled with a reluctance to invest here. In this scenario, a depreciation of the currency and a rise in interest rates can be expected. Government debt will cost more to service and this will put further strain on an economy whose growth rate is already expected to be less than 1% this year.
Assuming a downgrade does take place, the extent to which this actually affects the economy will depend largely on how the country responds to such an eventuality. If it brings about a more positive and dynamic approach to re-structuring and general implementation of the more positive aspects of the National Development Plan then a downgrade to junk might just have a positive effect in the medium term.
Looking back, South Korea was downgraded to junk in 1997 but following immediate corrective action it recovered its investment grade rating within a year. That’s the positive side. However, in Columbia’s case when it was downgraded to junk in 1999 it took 12 years to regain its investment grade status because the necessary reforms were not implemented fast enough.
Looking at this positively, maybe if South Africa loses its investment grade status it might just be the wake up call to action which the country needs.