South Africans who save should not be worried about expected debt downgrade

South Africans who have savings should not worry about the expected downgrade of the country’s sovereign debt rating.

This is because capital markets have a tendency to anticipate events of such an important nature.

The risk management of money has already been made on taking positions that hedge for the higher interest rates and equity price movements expected with a further downgrade.

This is the view of Francois Strydom‚ Momentum Securities Portfolio Manager‚ ahead of the announcement by two rating agencies on South Africa’s debt.

Moody’s and S&P Global are expected to make their decisions known on the rating of South Africa’s debt on Friday.

Another agency‚ Fitch‚ downgraded ratings of debt priced in foreign and local currency to junk status in April.

S & P Global only cut the foreign debt rating to junk‚ while Moody’s is a notch above junk status on both foreign and local currency debt.

Warren Ingram‚ executive director of Galileo Capital‚ said there would be no consequences for savers in the short term.

In the long term‚ the expected downgrades would cause government to borrow money at a more expensive rate. It could cause the rand to weaken against major currencies like the dollar and the euro‚ Ingram said.

“Investors always look ahead. Investors have anticipated a long time ago that the country’s credit rating might be downgraded‚” Ingram said.

Strydom said the downgrades would most likely not be devastating news for many investment vehicles‚ barring pure bond funds‚ in the very short term.

“Those unit trust funds or portfolio managers with sufficient direct offshore exposure or locally listed rand hedge instruments will be more likely to retain their value in the coming weeks‚” Strydom said.

He said the immediate fear of a downgrade on Friday was the expected portfolio outflows and subsequent rand weakening due to the restricted mandate of many global bond indices and bond fund managers‚ who may not hold sub-investment grade instruments.

“The bond market sell-off expected in the week following the likely downgrade will no doubt be severe‚ but it will also be short lived‚ as the attractiveness of the higher yields will bring back demand for our local debt.”

Strydom said the long-term impact of a non-investment grade or speculative rating of our sovereign debt would mean that both the government and private institutions would have to pay more to access the capital that was so vital to keep the wheels of the economy turning.

He said money market investors should also not be too concerned just yet.

Money market funds are only allowed to invest in very short-dated instruments‚ which will be much less affected by such bond market movements due to their low duration.

“The key is to look beyond what will happen on Friday. Whether you like it or not‚ the market has already discounted a very likely downgrade.”

Strydom said a prudent strategy was to have one’s investments spread between local and global opportunities.

He said there was no need to have all of one’s savings offshore if one would not have an actual liability offshore – for example‚ paying for tuition or a planned retirement abroad.

- TimesLIVE