What's going on?

The fallout from the political upheaval within South Africa had further repercussions on Friday as a second major credit rating agency termed South Africa�s bonds �junk� � yes, that�s a technical term!

What does this mean?

In a manner that�s kind of similar to your own personal credit rating, companies and countries have their ability to pay debt rated by international credit rating agencies (like Moody�s or S&P).


Last week, in the wake of South Africa�s president firing the country�s well-respected finance minister, two of the world�s biggest rating agencies downgraded their assessment of South Africa�s bonds to junk (from investment grade). The thinking is that without the involvement of the former finance minister, South Africa�s government is more likely to spend too much money and mis-manage the finances of state-owned companies (of which there are many).

Why should I care?

For the markets: International investors are now more likely to sell South African bonds.

Investors in bonds, in particular, partially rely on credit ratings to guide their investment choices. In fact, many investment funds are barred from buying bonds that are junk rated, which means that those investors would be forced to sell South African bonds. And, as investors sell a country�s bonds, they also tend to sell any local currency they own (and exchange it for, say, US dollars). The result is downward pressure on both South Africa�s bonds and its currency.

The bigger picture: Political risk is a serious consideration in emerging markets like South Africa.

Emerging markets typically have less stable governments and less established financial systems, making them more susceptible to political developments threatening investors.

South Africa�s current malaise is reminiscent of Turkey�s struggles last year, when it was downgraded to junk status amid internal political problems and government overspending.