What's going on?

Countries have credit ratings, just like individuals � and South Africa�s is worsening substantially, which is causing issues for Africa�s biggest country�

What does this mean?

Major credit rating agencies rank the risk of lending money to countries (as well as to companies). Many investment funds won�t touch bonds that are rated below a certain level (called �investment grade�). On Friday, a major credit rating agency announced that it�s downgrading South Africa�s government bonds to below investment grade and a second major agency said it was considering doing the same. The problem, in short, is that South Africa�s government spends much more than it earns (making it more difficult to repay its bonds). If both agencies downgrade South Africa, then investors will almost certainly sell a large amount of South African government bonds � as well as South Africa�s currency, the rand.

Why should I care?

For you personally: Investors in emerging markets are usually exposed to currency risks.

The downgrade specifically applies to South Africa�s rand-denominated government debt. It�s very rare for a country to actually default on debt that�s denominated in its own currency, because it can simply print more money when it needs it. So South Africa�s investors will likely get repaid. However, printing more money typically also causes the value of a country�s currency to decline, as each unit of currency represents less real value. This means that international investors would still lose money (when viewed in, say, US dollar terms).

The bigger picture: Emerging market investments have had a great year, but cracks are starting to show.

Investing in emerging markets has been one of the best strategies of the past few years, particularly as growth in China has picked up (notwithstanding some recent wobbles). This growth also benefits the many countries that do business with China. But there are some major emerging market economies digging themselves significant holes right now, including South Africa and Turkey, which is increasing the risks for emerging market investors.