Johannesburg - The rand fell to its weakest in six weeks against the dollar yesterday, underperforming most of its emerging market peers as investors fretted over South Africa’s ailing economy and the persisting threat of credit rating cuts.
Analysts said Africa’s most-industrialised economy was not yet out of the woods after dodging a downgrade from Moody’s on Friday, with Fitch and S&P Global Ratings (formerly Standard & Poor’s Ratings Services) – which both have South Africa one level above junk status – set to do their own reviews over the next couple of weeks.
Read: Rand remains under pressure
The rand fell more than 1 percent to R15.37 versus the greenback, the softest it has been since March 29, and was down 1.62 percent at R15.1227 by 5.15pm.
“It seems like a continuation of the sell-off in the local unit that we have seen in recent sessions. Rand sentiment is still quite weak,” ETM market analyst Jana van Deventer said.
“The market is not convinced that the efforts from government and business is entirely enough to prevent more negative credit ratings action.”
Moody’s, placing South Africa on review for a downgrade, maintained its rating at two notches above sub-investment grade on Friday, in what the government has touted as recognition of its efforts with business and labour to tackle constraints to growth.
But data on Monday showing an increase in unemployment to its highest since 2008 doused most of the optimism. The high unemployment rate is likely to feature in the Treasury’s meetings with Fitch and S&P’s within the next couple of weeks.
Goolam Ballim, the chief economist at Standard Bank, said despite Moody’s reprieve, downgrade pressure on South Africa remained.
“The bottom line is we must remain cautious and vigilant. Risks remain dominant. Economic growth is below population growth of roughly 2 percent, which therefore suggests South Africans are experiencing real income shrinkage. In short, with each passing day, a great proportion of South Africans are unemployed and those that are fortunate enough to see gainful employment are experiencing a slippage in their real income growth.”
Bert Stemmet, an analyst at NKC African Economics, said: “We have long said that Moody’s is probably too optimistic on South Africa. They routinely rate the sovereign higher than Fitch and S&P. The latter has South Africa rated at the lowest investment grade level with a negative outlook and we expect a downgrade to follow next month. If not then, probably later in the year.”
He said for rating agencies to be comfortable with South Africa’s investment grade rating, the economy needed to grow by at least 2.5 percent, and preferably 3.5 percent.
Nedbank economist Isaac Matshego said the rise in unemployment was disconcerting.
He said avoiding a downgrade to non-investment grade would require a sustainable, higher economic growth rate and steady improvement in employment levels.
* With additional reporting by Reuters
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