Rand falls to record low after rating cut

Debt outlook hits currency

THE RAND fell to a record against the dollar and bonds tumbled yesterday, sending yields to their highest levels since February 2014, after Fitch Ratings cut South Africa’s credit rating and Standard & Poor’s lowered its outlook on the country’s debt.

The rand declined by as much as 1.1 percent to R14.5399 per dollar before paring losses, weakening with most major and emerging market currencies as the greenback rose on speculation a strengthening US economy will boost the pace at which the Federal Reserve increases interest rates.

After the latest credit rating reviews, Finance Minister Nhlanhla Nene faces a tough Budget speech next February, where he will need to shore up government finances so as to stop the credit rating agencies from downgrading their assessment of the country’s ability to pay its debts.

The rand also took in stride Reserve Bank data showing South Africa’s net gold and foreign exchange reserves were lower at $40.471billion in November from $41.308bn in October.

Fitch downgraded South Africa’s sovereign credit rating to BBB- from BBB on Friday, citing the slowing economy and rising debt.

Standard & Poor’s (S&P) kept its own rating at BBB-, but changed the outlook to negative from stable, saying this reflected the view that economic growth might be lower than expected.

“Negative comments from Fitch and S&P were already largely priced into (the) weak exchange rate,” NKC African Economics said of the local currency’s muted response.

Analysts, however, said the rand, like other emerging currencies, could be in for some year-end battering as the market braced for the likely start of policy tightening in the US after upbeat payrolls data on Friday.

While Fitch’s decision to downgrade South Africa to BBB- rating, that of S&P to put South Africa on a negative outlook was, however, totally unexpected and a huge shock.

John Cairns, a currency strategist at Rand Merchant Bank, said based on how quickly S&P had downgraded other countries in the past, there was a real possibility South Africa would face a full downgrade next year, losing its investment grade status.

“S&P highlighted the slow pace of negative growth, the large current account deficit, and the contingent liabilities from state-owned enterprises with weak balance sheets.”

Cairns said the factors to get the outlook back to stable were: policy implementation, and