Executive Summary

We expected rand weakness to fade after the MTBPS. But the weakness faded much faster than even we anticipated. There may well be a lesson to be learnt from the fast recovery in the rand ahead of a potential Moody’s downgrade of South Africa’s sovereign rating and subsequent World Government Bond Index (WGBI) exclusion of the country’s local-currency debt.

We simulate a potential WGBI exclusion: our simulations show that after six months, the impact of a downgrade and subsequent WGBI exclusion is likely to be negligible. Bonds recover first, then the currency and then inflation. The risk, in our view, is that markets normalise much faster than our analysis suggests.