Hence, a downgrade to sub-investment status would in effect mean that certain institutional investors holding these investments would have to divest their holdings of the affected debt instruments, which is likely to lower their value, further increase the country’s risk profile, and by implication raise external financing costs. This can eventually adversely impact on the country’s economic fundamentals and growth prospects.
While the issue of South Africa’s sovereign credit rating has been covered extensively in the media, one aspect that has scarcely been discussed is the distinction between foreign and local currency ratings. This distinction is important. Put simply, the foreign currency rating is an indication of a country’s credit worthiness when issuing foreign currency-denominated debt.