Will Moody’s downgrade South Africa’s government issuer rating to B or below before 1 April 2016? (update)

Some interesting news out of South Africa this morning:

Ratings agency Moody’s is waiting for more detail in Finance Minister Pravin Gordhan’s Budget speech this month to determine if South Africa “will succeed in steadying (market) confidence”, it said on Friday….

South African investors were watching the address with piqued interest, because the right move from Zuma could ensure the country remains out of “junk status”, while the wrong move would plunge the country into the sub-investment grade status that would have perilous consequences on the economy’s GDP.[1]

It’s worth pointing out that South Africa could be downgraded to junk status without going down to a B-rating. “The term ‘junk’ is reserved for all bonds with…[a] Moody’s ratings below Baa”[2]. Since Moody’s currently rates South Africa as Baa2, it can lower South Africa’s rating a full level to Baa3 without dropping it to junk status. And even if Moody’s does downgrade South Africa to junk status, it would have to lower it three further grades (Ba1, Ba2, and Ba3) before South Africa received a straight B-grade. That remains a possibility, though a very remote one in the next six weeks.

[1] http://www.politicsweb.co.za/news-and-analysis/moodys-looks-to-pravin-for-market-confidence

[2] http://mockingbird.creighton.edu/english/fajardo/teaching/srp435/junkbond.htm

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