A cautious optimism
SUDDENLY it is not all bad news for the country’s outlook as the focus shifts to what the South African Reserve Bank’s monetary policy committee will decide when it announces the repo rate on Thursday. Last month’s inflation figures have come in at 4%, down from 4.4% in January, which analysts say might herald a cut of at least 25 basis points.
The good news, however, is undoubtedly Moody’s decision to retain the country’s investment grade rating. A downgrade to junk status would have removed South Africa from the Citi World Government Bond Index, which would have forced many asset managers and pension funds to sell South African bonds. This would have an awful impact on the rand and bond yields, hiking the cost of debt and making life considerably difficult.
Yesterday the rand firmed against the dollar in morning trade, spurred on by the news that the country had escaped a third junk rating. By mid-morning it was trading at R11.66 to the US dollar, R11.50 against sterling and R14.42 against the euro. The currency has gained more than 5% so far this year. Moody’s decision is a huge confidence boost. It reflects the positive sentiment that has prevailed as a result of the election of Cyril Ramaphosa as president.
His cabinet reshuffle that brought in credible ministers such as Nhlanhla Nene and Pravin Gordhan back to the cabinet has, in turn, met with widespread approval. This is reflected in the rand. The currency sank to its lowest level yet against major currencies on December 9, 2015, shortly after president Jacob Zuma removed Nene as finance minister and replaced him with the unknown David van Rooyen. The rand hit R15.38 against the greenback within minutes after the announcement. Against the pound and euro, the South African unit traded at R22.67 and R16.46 respectively.
During his State of the Nation address, Cyril Ramaphosa expressed a strong commitment to routing out corruption and fast-tracking reforms to state-owned enterprises. While all this is excellent news for the economy, analysts are in one voice that South Africa will regain its investment rating from all three major credit rating agencies only once it achieves sustainable levels of higher economic growth and tackles its unacceptably high rates of unemployment, poverty and inequality. The 9.2 million jobless South Africans will agree.