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Sovereign rating downgrade: what this means for international index inclusion


In line with Futuregrowth’s long-held view on South Africa’s sovereign credit rating, Standard & Poor’s Global Ratings (S&P) downgraded South Africa’s long-term foreign currency (LTFC) rating to sub-investment grade on the 3rd of April 2017 (from BBB- to BB+).

Foreigners currently own 36% of South Africa’s local currency debt, equivalent to about R600bn. An estimated R175bn of this is potentially at risk in the event of foreigners being forced sellers of local currency debt as a result of international bond indices exclusion. For context, R175bn of domestic debt is equivalent to about 74 nominal government bond auctions. 

An understanding of international index inclusion criteria thus becomes important in evaluating the risk of forced selling of domestic debt by foreigners:

  • Two of the major global bond indices that SA is included in, Citi Bank’s World Government Bond Index (WGBI) and Barclay’s Global Aggregate Index (Global Agg.) invest in investment grade, local currency bonds – as opposed to foreign currency denominated bonds.
    • It’s therefore of critical importance to note the one notch ratings differential from S&P of South Africa’s long-term foreign currency rating (BB+) vs. our long-term local currency rating (BBB-).
    • Further to this, WGBI inclusion criteria dictates that a sovereign maintain an investment grade long-term local currency (LTLC) rating from either S&P or Moody’s. Global Agg. Inclusion criteria dictates that a sovereign maintain an investment grade LTLC ratings from either S&P, Moody’s or Fitch.
  • Two other major global bond index that SA is included in are JP Morgan’s Global Diversified Index (EMBI) and Barclay’s Emerging Market Local Currency Government Bond Index (EMLGBI) and these indices inclusion criteria are ambivalent to credit ratings. The inclusion criteria of these indices is premised on a countries income classification as well as bond market depth and liquidity.

The bar to foreigners being forced sellers of domestic debt has markedly reduced over the last quarter, as a result of both S&P’s recent ratings downgrade as well as a narrowing of its “notching differential” between SA’s LTLC and LTFC rating. S&P’s maintained “negative” sovereign outlook alongside Moody’s 90 days credit watch leaves the door open to WGBI exclusion over the medium term.  

Sovereign credit rating scale: