Moody’s gives SA reprieve
Country will have to earn business confidence from scratch
INTERNATIONAL ratings agency Moody’s yesterday gave South Africa a stay of execution of up to three months to get its economic house in order.
Moody’s said it would not make its pronouncement on the country’s sovereign credit rating decision on Friday as planned, but could take up to three months to do so.
Moody’s has South Africa’s sovereign at two notches above non-investment grade at Baa2. The agency had earlier warned that it had placed South Africa on a review for a downgrade.
Economists and experts warned that a more aggressive reaction could still be on the cards.
NKG Africa said the country risked further downgrades if fiscal and macroeconomic performance deteriorated substantially from the baseline forecasts.
“Fiscal prudence is no longer a given and markets will take a sceptic wait-andsee attitude towards the newly appointed leadership,” the research agency said. “The new leadership will have to gain the trust of businesses and markets from scratch.”
Moody’s stance eased the rand’s downward slide against the dollar as the government also moved to assure the ratings agencies that there would be no abrupt changes in the country’s economic policies.
The rand briefly flirted with the R14 mark to the dollar at R13.94 by 8am yesterday before recovering to R13.83 by the opening of the JSE an hour later.
By 5pm, the rand was R13.52 against the greenback.
Banking stocks, however, continued to struggle, remaining in the negative territory for the better part of the day, despite assurances from Standard Bank and Nedbank that the banks were in good shape and well-prepared to deal with the volatility and pressure of sovereign rating downgrades.
The banks have lost billions since the volatility started last week. FirstRand’s (the country’s biggest bank) assets fell 0.11 percent to R42.70, followed by Standard Bank at 0.58 percent lower to R142.67 and Nedbank retreating 0.55 to R235.60.
Only Barclays’ Absa traded 0.8 percent higher at R144.14.
Jumped The government dollar bond yields also wilted and credit default swops rose.
The yield on the benchmark 2026 bond jumped nearly 3 basis points to 4.93 percent while the five-year credit default swops – the cost of insuring South African government debt against default – added 1 basis point to 225 bps, its highest level in nearly four months – from Monday’s close of 224 basis points.
Investment Solutions chief economist Lesiba Mothata said the SA Reserve Bank would carefully monitor the situation to see if the ensuing sell off could become disorderly and threaten the stability of the financial system.
Mothata said should the rand decline further and bank shares remain in the negative alongside the rise in bond yields create instability in markets through intensified capital flight, the bourse could rise interest rates.
“The short- to medium-term impacts could prove painful. It’s in times like these that investors need to hold on to a diversified and long-term investment strategy,” Mothata said.
“Even as a political storm is once again battering South Africa, history has shown that, in the long-term, markets have the ability to return to fundamentals even when shortterm noise, especially from the political sphere creates angst,” Mothata said.
Lerumo Capital equity analyst Maudi Lentsoe said the cautious reaction suggested that the market was watching what the government planned to do in the next few months.
“A couple of months down the line, if we do not get our act together, we certainly run the risk of having the domestic debt also being downgraded and that would be catastrophic.”
Rand’s downward slide against the dollar eased slightly, markets adopt wait and see attitude.
President Jacob Zuma said yesterday that South Africa remained committed to fiscal consolidation, while new Finance Minister Malusi Gigaba said the government would stabilise public debt.
The rand tumbled more than 1 percent in early morning trade, capping a 12 percent loss against the dollar since Zuma ordered former finance minister Pravin Gordhan to cut short his roadshow and investor trip last week.
Zuma said he had instructed Gigaba to prioritise unity, peace, cohesion and stability within the finance portfolio.
“We also wish to emphasise that government has been, and will remain, committed to a measured fiscal consolidation that stabilises the rise in public debt,” Zuma said at the launch of the Trans Africa locomotive at Transnet’s factory in Koedoespoort, Pretoria.
On Monday the rand went on a free fall and banking and financial stocks also plummeted, after S&P Global Ratings downgraded South Africa to junk status, citing policy uncertainty and executive changes, particularly in the National Treasury, as reasons.
The rand fell 2 percent against the dollar and followed, shedding more than 1 percent as the effect of last week’s unceremonious sacking of Gordhan ripped through the market.
Gigaba said the government