Johannesburg - The rand fell to a record against the dollar and bonds tumbled yesterday, sending yields to their highest levels since February 2014, after Fitch Ratings cut South Africa’s credit rating and Standard & Poor’s lowered its outlook on the country’s debt.
The rand declined by as much as 1.1 percent to R14.5399 per dollar before paring losses, weakening with most major and emerging market currencies as the greenback rose on speculation a strengthening US economy will boost the pace at which the Federal Reserve increases interest rates.
After the latest credit rating reviews, Finance Minister Nhlanhla Nene faces a tough Budget speech next February, where he will need to shore up government finances so as to stop the credit rating agencies from downgrading their assessment of the country’s ability to pay its debts.
The rand also took in stride Reserve Bank data showing South Africa’s net gold and foreign exchange reserves were lower at $40.471 billion in November from $41.308bn in October.
Fitch downgraded South Africa’s sovereign credit rating to BBB- from BBB on Friday, citing the slowing economy and rising debt.
Standard & Poor’s (S&P) kept its own rating at BBB-, but changed the outlook to negative from stable, saying this reflected the view that economic growth might be lower than expected.
“Negative comments from Fitch and S&P were already largely priced into (the) weak exchange rate,” NKC African Economics said of the local currency’s muted response.
Analysts, however, said the rand, like other emerging currencies, could be in for some year-end battering as the market braced for the likely start of policy tightening in the US after upbeat payrolls data on Friday.
While Fitch’s decision to downgrade South Africa to BBB- rating, that of S&P to put South Africa on a negative outlook was, however, totally unexpected and a huge shock.
John Cairns, a currency strategist at Rand Merchant Bank, said based on how quickly S&P had downgraded other countries in the past, there was a real possibility South Africa would face a full downgrade next year, losing its investment grade status.
“S&P highlighted the slow pace of negative growth, the large current account deficit, and the contingent liabilities from state-owned enterprises with weak balance sheets.”
Cairns said the factors to get the outlook back to stable were: policy implementation, and improving investment confidence and resultant stronger growth.
Annabel Bishop, the chief economist at Investec, said a change in the outlook by S&P could see some rand impact over the week as it was less expected.
Surprise
She said the rand was assisted with some immediate stability by the US interest rate being increasingly likely.
Peter Attard Montalto, an emerging market analyst at the London-based Nomura International, said S&P’s outlook revision was a bit of a surprise and reflected a change in view, albeit within the same framework.
He said originally, the sub-investment grade theme was always about institutional quality and political will to reform.
“That framework remains, but S&P now sees the risk that parastatals support puts greater a drag on the fiscus (on balance sheet) as well as the fact that growth may surprise to the downside, and structural reforms are not occurring to boost it and improve business confidence.”
Colen Garrow, a Lefika Securities’ economist, said credit rating agencies had often attracted criticism and, in some instances, correctly so.
He said it was S&P in particular that was highly criticised by market participants for not anticipating the financial crisis, which caused the near implosion of the global economy in 2008.
Garrow said the other criticism was that rating agencies were remunerated by companies they were doing assessments on, and this could hardly be seen as being objective.
Subsequent downgraded assessments by any sovereign or corporate risk were, therefore, viewed suspiciously for many years.
“However, the global economy has moved on, and although its recovery has become patchy and uneven, credit rating agencies today provide some of the most objective risk assessments of countries.”
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