德意志银行-南非信贷-special report south africa’s credit downgrade in em context-20170710-deutsche bank.pdfVIP

Deutsche Bank Research Sub-Saharan Africa Economics Date South Africa Special Report 10 July 2017 South Africas credit downgrade in EM context Danelee Masia Challenging some of the misperceptions over downgrade implications Since most of our forecasts are relatively bullish against the backdrop of more Economist downgrade pressure, this note contains more details substantiating our views. +27-11-775-7267 We would like to challenge some of the thinking that still exists in some discussions we have with our client base - i.e. the worst may still be ahead for South Africa if further downgrades come our way. General market perceptions include: firstly, downgrades cause recessions, and lead to higher inflation, a weaker exchange rate and policy rate hikes. Secondly, foreign buying of local assets not only dry up, but also reverse. Thirdly, these ramifications are negative for markets, increasing pressure on bond yields and downside risks to equities. EMs are mostly fine after losing IG status and SA should be no exception In our note, we find that: 1) recession risks precede downgrades; inflation tops within a quarter of losing IG status; exchange rate pressures last no longer than three to six months; and central banks cut rates to revive growth; 2) sustained capital outflows are unlikely, but offshore buying tapers once the sovereign slips below IG; 3) bond yields rally significantly one to two years after the downgrades, despite forced selling and downward pressure on equities reverse a lot sooner. These lessons are highlighted in Figures 6 -15 for EM countries that lost investment grade (IG) post 2000. South Africa should be no exception to these trends, in o