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South Africa Eludes Third Junk Rating as Markets Beg to Differ

Andres Guerra Luz and Ben Bartenstein

(Bloomberg) -- South Africa dodged its third junk rating late Friday -- something markets had been counting on for months -- as Moody’s Investors Service maintained the nation’s lowest investment grade score.

Investors and analysts had been expecting Moody’s to join S&P Global Ratings and Fitch Ratings in dropping the nation’s debt to non-investment grade. The move would have been “a long time coming” as South African data suggested a deteriorating rating for some time, Peter Kinsella, global head of FX strategy for Union Bancaire Privee, said on Bloomberg TV in London.

Instead, Moody’s just revised its outlook for the nation to negative from stable.

The South African rand has tumbled nearly 4% over the past six months, the fourth-most in the developing world. Strategists at Bank of New York Mellon Corp. had warned that a downgrade would have removed the country from the FTSE World Government Bond Index, spurring up to $15 billion in outflows.

“I think there will be some turbulence in the short term and more downward pressure on the rand,” said John Ashbourne, London-based senior emerging markets economist at Capital Economics. “There is no way to pretend that this isn’t bad news.”

In fact, traders were already bracing for wild swings in the rand after the scheduled review. The spread of one-week implied volatility for the rand versus the dollar over the three-month measure moved to its widest since March on Thursday.

Here’s what analysts, strategists and money managers had to say:

Cristian Maggio, London-based head of emerging-market strategy at TD Securities:

“South Africa has been a car crash in slow motion, in a certain sense. We’re still at a point where that car has not hit that wall, but you can definitely see that’s where they’re going”“People cannot get rid of South Africa until South Africa gets kicked out of the indices.” Investors who have greater flexibility to cut their exposure more significantly, likely have done it alreadyWhile in the short-term there may not be drastic movement in assets, investors who are concerned about the developments are likely building “quite sizable hedges” through other means, like shorting the rand“This may well continue over the coming weeks or months, because this is a process that will take many months. I don’t think anyone wants to sit on their hands and just wait for South Africa to be expelled without doing anything at all”An outright downgrade would have been much worse, and a credit watch negative would have also been worse, he said. “The negative outlook is the minimum damage that Moody’s can inflict on South Africa by changing its previous stance”

Pavel Mamai, founding partner at London-based hedge fund Promeritum Investment Management LLP:

Markets likely won’t move much on the decision because a negative outlook was priced in. There might even be a bit of a relief rally, “if a lot of investors, especially the locals, were expecting a straight downgrade”Accompanying the change in outlook were specific conditions for maintaining credit rating or facing a downgrade, sending the government “a clear message” that it needs to make reformsThe decision “helps create a sense of urgency in South Africa, which we have felt sometimes was absent”

Capital Economics’ Ashbourne:

The decision had been widely expected, as the nation already looked worse, on almost all metrics, than its ratings peers and its bonds were trading in line with junk sovereignsA downgrade is probably inevitable, and “will be a shock to the local bond market” when it happens, but longer-term, “it won’t be a big surprise and South Africa will still find buyers for its debt -- most of which is sold to local investors”

To contact the reporters on this story: Andres Guerra Luz in New York at aluz8@bloomberg.net;Ben Bartenstein in New York at bbartenstei3@bloomberg.net

To contact the editor responsible for this story: Carolina Wilson at cwilson166@bloomberg.net

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