Rand is better but the ratings agencies loom

INVESTORS are positive after the dramatic political events of the week which shrunk the risk premium on South African assets and gave the rand a boost. The rand outperformed 23 other emerging market currencies.

Dropping charges against Finance Minister Pravin Gordhan and releasing the state capture report worked in South Africa’s favour on the global currency market.

This week the market had been awash with negative sentiment over emerging market currencies as a poll showed Donald Trump was ahead in the US presidential election race.

Americans vote on Tuesday and if Trump wins, emerging market currencies, including the rand, will be negatively affected. Investors would then be likely to prefer safer asset classes like gold and US treasuries.

The rand proved to be the most resilient currency against negative global market sentiment this week, gaining more than 2% against the dollar.

Piotr Matys, currency strategist at London-based Rabobank, said the main reason was the “positive news” about Gordhan.

Shares in major banks also lifted on the news of the dropped charges after taking a knock of more than R50-billion earlier in October when the charges were announced. The JSE banking index rallied just under 3% in the week compared with a decline in the All Share index of just over 2%.

The rand has been more than 20% stronger against the pound since mid-June and has appreciated more than 6.2% against the dollar over the same period.

Matys said that over the medium term US rate hikes and Gordhan’s achievement of fiscal targets should lead to further strengthening of the rand against the dollar to a level of R12.70.

Ricardo da Camara, a financial market analyst at ETM Analytics, said: “Clarity of sight is an extremely important factor for investors. This relates to economic policy implementation and management as well as political certainty.

“As the risk premia associated with South African assets subsides on account of the political environment stabilising, so the rand has staged an impressive recovery.”

But he said valuation metrics showed the rand was 20% undervalued.

“It does offer investors some perspective of where the bias might rest if fundamentals were allowed to unfold without the political noise that South Africa has experienced through 2016.”

He said in coming months the narrowing of the budget and current account deficits and a positive real interest rate environment should be rand positive and assist the strengthening of the currency.

“A rand that is now allowed to trade more according to underlying fundamentals will further assist in the taming of the medium-term inflationary pressures which will assist in turning the business cycle more positive.”

A weaker rand increased the cost of imports, especially fuel and parity-priced foods like maize and wheat, Da Camara said. It also elevated inflationary pressures, and the possibility of interest rate hikes.

Investors also viewed President Jacob Zuma’s decision to drop his court bid to prevent the state capture report from being released as positive.

John Cairns, RMB currency strategist, said: “One thing that a number of market participants have mentioned is that the remedial action [in the report] is not very strong and will not happen quickly.”

Ahead of the report’s release on Wednesday, business, labour and civil society leaders gathered to denounce corruption and to stand up for democracy.

Businessman Reuel Khoza, the outspoken former chairman of Nedbank, said on Friday: “You have people who quintessentially represent that which is good governance, a sound leadership also demonstrating that good governance ultimately wins the day.

“What that generates internationally is confidence — business confidence, investor confidence . . . is crucial for any political economy to make progress and we have all of those essentially strengthened.”

But developments this week may not be the focus of ratings agencies.

S&P Global Rating begins its review of South Africa this month ahead of its ratings decision on the country due to be announced on December 2.

It said this week that the government needed to demonstrate how the economic growth outlook had improved and business confidence had perked up.

S&P’s rating for South Africa is BBB- with a negative outlook on the lowest level of investment grade.

The concern is that, along with other ratings agencies, S&P will downgrade the country to subinvestment grade, or junk.

This will raise borrowing costs and weaken the rand.

Moody’s will release its review late this month. Fitch is also expected to announce its decision before the end of the year.

Rand will assist in the taming of medium-term inflationary pressures