In a recent article in the Daily Maverick, Tim Cohen wrote about the possible effects of...

In a recent article in the Daily Maverick, Tim Cohen wrote about the possible effects of a downgrade of the South African (SA) Government's USD-denominated debt by Moody's to sub-investment grade at the end of March, 2019. This downgrade would move SA government debt into "junk" status as the other two global rating agencies have already downgraded it to this level.

Clearly explain what do rating agencies such as Moody's do. Why is it important for the South African government to be rated by them?

Expert Solution

Rating agencies like Moody's main source of income is through the rating of different securities especially debt instruments like Government securities, Corporate bonds, debentures, Municipal bonds etc. They charge a fee for rating from the companies or Governments who issue such securities. The rating will be based on several factors of the instruments which includes, default risk, consistent cash flow, liquidity risk, previous history etc.

It is important for South African governments to be rated by them because, investors who are interested in such securities want a minimum level of guarantee about the funds performance and its reliability. This is made possible through such agencies. As for selling the debt instrument and getting a deserving market price it is a must for the government to get these ratings. Also if the government want to attract the foreign investment, these rating acts as a standard.

jeff jeffy answered 2 years ago

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