Prepare for volatility if SA gets junk rating

“PERSONAL FINANCE 

Bruce Cameron

Spend less, build up and preserve your savings, diversify your investments to reduce risk and stick to your long-term investment goals. This is the advice from two investment professionals on how to weather the extreme market volatility that could occur if the country’s sovereign (government) debt is downgraded to “junk” status.

They were addressing a meeting of the Actuarial Society of South Africa this week on the possible consequences of credit rating agency Standard & Poor’s (S&P) downgrading South Africa’s debt from its current investment-grade rating of BBB- to a non-investment grade (or junk) rating of BB+.

International institutional investors, such as retirement funds, regard S&P’s ratings as the most important, and it is likely that S&P will be the first ratings agency to announce a downgrade.

Lesiba Mothata, the chief economist at Investment Solutions, and David Knee, the head of fixed income at Prudential Investment Managers, say the downgrade could take place in June or as late as December.

The main consequences of a downgrade will be:

Large foreign institutional investors will either not invest in South Africa or withdraw their existing investments. This will be exacerbated by South African companies investing abroad rather than locally.”

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