Did that hurt? Hard to say

CityPress - - Business - DEWALD VAN RENS­BURG dewald.vrens­burg@city­press.co.za

Two weeks af­ter the re­call of for­mer fi­nance min­is­ter Pravin Gord­han from his in­vestor road­show, the reshuf­fle of Cab­i­net and the down­grade of South Africa’s credit rat­ing, the main eco­nomic vi­tal signs are hold­ing steady. On Thurs­day at 4pm, the rand stood at R13.47 to the dol­lar while the yields on 10-year gov­ern­ment bonds closed at 8.82%. Some of the pre­dic­tions of what would hap­pen af­ter the down­grades from S&P Global and then Fitch Rat­ings were ev­i­dently overblown.

The de­pre­ci­a­tion of the rand was no­tice­able, but at the same time, the rand had been un­usu­ally strong right be­fore the re­call, notes Izak Oden­daal, an in­vest­ment strate­gist at Old Mu­tual Multi-Man­agers.

The ques­tion is why the rand was so strong, said Oden­daal. “The for­eign driv­ers are pos­i­tive for South Africa. Com­mod­ity prices, the sen­ti­ment to­wards emerg­ing mar­kets and the dol­lar are all work­ing in our favour at the mo­ment,” he said.

The ex­change rate of R12.30 against the dol­lar achieved briefly on the last day be­fore Gord­han was called back from the UK made the rand the best­per­form­ing cur­rency in the world this year. You should prob­a­bly com­pare it with the whole pre­ced­ing quar­ter in­stead, said Oden­daal.

“If you nor­malise it over the en­tire pre­vi­ous month, the de­pre­ci­a­tion was not that se­vere,” he told City Press.

The dif­fer­ence would be a weak­en­ing of about 4% in­stead of 10%.

“I think the down­grades we got were priced in, but it would still be a sur­prise if Moody’s down­graded us to junk.”

“If you com­pare this time to Nenegate, it was not a sur­prise,” said Oden­daal. “Also, Nene was fired at the worst pos­si­ble time.”

At the end of 2015, all the in­ter­na­tional forces that play an over­whelm­ing role in the value of the rand and the yields on de­vel­op­ing world gov­ern­ment debt were ar­ranged against coun­tries like South Africa.

It was the start of the cy­cle of in­ter­est rate in­creases in the US that caused a lot of anx­i­ety about how se­verely the Fed­eral Re­serve would hike its in­ter­est rates. All things be­ing equal, an in­crease in rates in the es­sen­tially risk-free US mar­ket sucks money out of ev­ery­where else.

To­day, com­mod­ity prices are much bet­ter and the in­ter­est rate path in the US is look­ing mod­er­ate, said Oden­daal.

The ma­jor fear re­mains the prospect of “real” junk sta­tus should Moody’s and S&P down­grade South Africa’s rand­de­nom­i­nated debt to sub-in­vest­ment grade.

This should cause forced sales of bonds by in­vestors who only buy South African bonds be­cause they are in the ma­jor bond in­dices, although the scale of this po­ten­tial ef­fect is also hard to gauge. “It is hard to say how much money ac­tu­ally fol­lows these in­dices,” said Oden­daal. “The big three are Citi, Bar­clays and JP Mor­gan. In the Citi one, South African bonds make up about 0.2% or 0.3%, so peo­ple would re­ally have to make an ef­fort to in­clude us.”

“The short an­swer is we don’t know. There is a risk, but mostly peo­ple do not fol­low the in­dices.

“Ul­ti­mately, it is all about whether we can pay our debt. We are not like Nige­ria or An­gola where you can have an ac­tual cri­sis due to a dol­lar short­age when the oil price falls.”

“You have seen claims [of] about R50 bil­lion [be­ing] lost ... those types of cal­cu­la­tions are a lit­tle sen­sa­tion­al­ist. You only lose that money if you bought at the price be­fore the fall and then sold.”

In the short term, mar­kets will eas­ily be moved if new Fi­nance Min­is­ter Malusi Gi­gaba sug­gests any changes to fis­cal pol­icy, said Oden­daal “I think Gi­gaba’s pol­icy will be to try to be care­ful and make the right noises.”

But it is not just lo­cal pol­i­tics that drive the mar­ket. “The other thing is the Syr­ian sit­u­a­tion. If it wors­ens fur­ther, it will make in­vestors move away from risky as­sets over­all and flee to the US. It has noth­ing to do with us, like the sub­prime cri­sis in the US had noth­ing to do with us, but you still see the money go­ing into US bonds.”

Oden­daal and col­league Dave Mohr this week pointed out that Rus­sia and Brazil both saw the main mea­sure of gov­ern­ment fis­cal risk – their bond yields – start fall­ing shortly af­ter the two coun­tries got rated as junk be­cause of “out­side fac­tors”.

In its Mon­e­tary Pol­icy Re­view pub­lished this week, the SA Re­serve Bank said that the events of the past few weeks might mark a turn­ing point for the cur­rency, but “at present the out­look is un­cer­tain”.

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