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South Africa and the Citigroup World Government Bond Index

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Citigroup World Government Bond Index

The Citigroup World Government Bond Index (or WGBI) measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. With more than 25 years of history, the WGBI is a widely used benchmark that currently comprises sovereign debt from more than 20 countries, including Australia (EWA), Canada (EWC), Germany (EWG), and Japan (EWJ).

Investors commanding ~$2 trillion worth of funds track the WGBI, a powerful reason for South Africa’s government (EZA) to encourage an investment environment. To have its bonds included in the WGBI, South Africa needs an investment-grade rating from at least two rating agencies.

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Why credit ratings matter

Credit ratings are important, as they help determine a country’s cost of borrowing and influence investor appetite for its debt and equities. This affects how much capital flows into the country and the value of the rand.

Continuous downgrades are a recipe for economic and financial disaster in the long run. During the course of 2014, South Africa’s credit rating has been cut by Standard & Poor’s Financial Services (or S&P) and Fitch Ratings to BBB- and BBB, respectively. On November 6, Moody’s downgraded South Africa by one notch to Baa2, just two notches above “junk status.”

Effect of junk status

Any news of South African debt being given junk status would sharply drive up foreign borrowing costs for the government and private sector alike. It would also discourage investment, forcing large sales of bond holdings by foreign investors, as South African bonds would be excluded from the Citigroup World Global Bond Index.

Next, let’s take a quick look at South Africa’s ratings and the rationales offered by major credit rating agencies.

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