Once upon a time, the sovereign credit downgrade of an emerging market powerhouse would be enough to send global markets into spasms of selling. The curious case of South Africa, however, has been decidedly different.
Indeed, despite being the "S" in BRICS (Brazil, Russia, India, China—the largest emerging economies in the world—the situation in South Africa appears to have very limited spill over for other markets.
Although the country's $143 billion in external debt remains high by historical standards, that burden is considerably lower than other debt-heavy economies like Greece, whose struggles with investors and euro zone officials to reduce its debt pile often reverberate across global markets.
The recent and sudden ouster of South Africa's respected finance minister, Pravin Gordhan – coupled with rising political instability that may yet force President Jacob Zuma from office prematurely – have sent the country's risk premiums soaring. Gordhan's replacement, Malusi Gigaba, is a former Home Affairs official with little financial or economic experience.
The turmoil prompted ratings agencies S&P and Fitch to downgrade South Africa's sovereign rating from BBB- to BB+, to speculative or "junk" levels, with a negative outlook. Meanwhile, Moody's also placed its Baa2 rating on downgrade review.
Although South Africa's official currency, the rand, has taken the downgrade on the chin, investors say the fallout from the downgrades appears contained—at least for now.
According to Africa watchers, investors have been leery of the potential for a downgrade for some time, largely because of the faltering economy. Under normal circumstances, a ratings cut of South Africa's magnitude would have prompted widespread portfolio adjustments by big investors.
"This is a very South Africa-specific story in terms of its unique political dynamics," James Barrineau, head of emerging market debt with investment manager Schroder's told CNBC recently.
"We expect some forced selling of South Africa from funds that can hold only investment-grade rated credits; however much of this was anticipated by the markets and occurred immediately following the news that Gordhan would be out," Barrineau added.
Not out of the woods yet
Still, South Africa's slow descent into political and economic pariah status was made complete, thanks to the one-two punch of S&P's and Fitch's downgrades.
"While the loss of [an] investment grade rating is a setback for South Africa, the impact on external debt has been limited, with the yield on the 10-year Eurobond rising" marginally, according to Kevin Daly, portfolio manager with the emerging market fixed income team with Aberdeen Asset Management told CNBC.
At least for the moment, emerging investors won't be forced to sell their South African holdings because of the downgrade, Daly added.
Yet new cuts to South Africa's credit rating could "prompt selling by crossover investors who are benchmarked to the Barclays Aggregate Bond index," Daly said—a move that could impact at least part of the index's estimated $42 billion worth of benchmarked debt.
Meanwhile, the local impact has been felt far more acutely. The slide has heaped new pressure on a drought-stricken farm sector that must now contend with food inflation, the byproduct of a weak currency.
"The impact on local rates and the currency has been much more significant as the 10-year yield has climbed around 40 basis points to [around] 9 percent, while the rand has taken the brunt of the selloff," Daly said. "So further downgrades and rising political risk are likely to weigh on local assets in the coming weeks," including the beleaguered rand, he added.
Going forward, the markets will be looking for renewed signs of fiscal discipline, even if some pet projects, like the development of nuclear power, move forward. Analysts expect local assets to remain under pressure, even if global markets are shrugging off the downgrade.
That said, the level of political risk in South Africa remains high, with the embattled Zuma the subject of widespread political speculation. With an inexperienced finance chief at the helm, economists expect the central bank to be forced to pick up the slack.
"With the National Treasury now compromised, the South African Reserve Bank (SARB) may need to shoulder more responsibility to sustain institutional credibility and maintain orthodox economic policies," Brett Rowley, managing director of emerging markets research at TCW, told CNBC.
Correction: Brett Rowley of TCW is the source of the final quote in this story.