South Africa is Not a Junk Country.
South Africa was recently downgraded to sub-investment status. Panic struck as both Fitch and Standard & Poor’s downgraded South Africa. Sub-investment grade means that South Africa is a highly risky investment, and certain financial institutions are not permitted to invest where such uncertainty exists. George Herman, Citadel’s Director and Chief Investment Officer published an article in opposition to the widely used term ‘junk status’. He believes this term is not technically correct and creates a misconception of South Africa’s true investment potential.
“The word ‘junk’ is loaded with negative sentiments. It is vitally important in turbulent times like these to remain calm and objective, and not get embroiled in these emotional judgements”, argues George Herman. ‘Junk’ refers to rubbish that has no other use but to be thrown in the garbage. This investment jargon isn’t a term accepted by rating agencies. It derives from conservative investment firms that are risk averse and subject to regulations barring any investments in countries rated at sub-investment grade. These organisations dubbed the term ‘junk status’ for such countries.
George Herman emphasises that South African investments are not destined for the garbage. Yes, our pool of investors has shrunk, which poses problems. Inflated interest rates on government bonds will increase government debt and constrain public spending. With a large portion of citizens dependent on the state for welfare and basic services, the poor will be hit the hardest.
But we should remain optimistic, confident in the fact that South Africa is not a ‘junk’ country, but rather one with resilience and great investment potential. We are at sub-investment level due to political uncertainty. With strong leadership, South Africa can bounce right back!
B. de Jager
(Source: G. Herman. 2017. ‘A Binary Line in the Sand’.)