South Africa: Do Credit Rating Reviews Make Any Sense in the COVID-19 Context?

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As South Africans prepared for a 21-day lockdown, a sovereign credit rating downgrade that had hung like the Sword of Damocles over the country was pushed to the back of the collective consciousness. On Friday, the sword fell, dumping the country into junk status.

SA's downgrade to credit-risk junk status could not have come at a worse time and begs the question of whether credit rating reviews make sense in a time of crisis.

With Moody's following its peer agencies and rating the country below investment grade, South Africa has fallen out of important bond indices, making it much more expensive for the country to borrow money.

The downgrade has already had consequences. Following the announcement, the rand lost nearly 2% against the dollar, which meant a loss of more than 6% since the beginning of March.

Over the next week, we will see whether the markets had already priced the downgrade in, as some analysts suggested.

Even if the downgrade is priced in, the move will result in further pain for an economy that was already shrinking prior to the lockdown and will undoubtedly have a negative impact on the national budget.

The irony is that Covid-19 has forced...

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