SA riskier than in the past, say credit rating agencies
THE RAND continued to weaken on negative investor sentiment yesterday as South Africa faces increased risk of ratings agency Moody’s Investors Service downgrading its credit profile to junk next month if its fiscal and economic strength erodes further.
The currency, which opened trading at R15.02 to the dollar went as low as R15.10 in mid-day trade, 14 percent lower than yesterday’s close, as the South African Reserve Bank told Parliament that South Africa’s rising country risk was putting upward pressure on interest rates, even as inflation expectations are dropping, with credit-rating agencies contributing to the negative sentiment.
Chris Loewald, a member of the bank’s Monetary Policy Committee and head of economic policy development and research, said yesterday that credit-rating companies were contributing to a view in financial markets that South Africa was riskier than in the past.
By 5pm, the rand was at R15.0339, down 2 cents from the previous close.
Economists said yesterday that market reaction to Moody’s on Monday slashing South Africa’s growth forecast to just 0.7 percent signalled anticipation that the economy was heading towards full junk status.
Moody’s is expected to deliver a market review in March.
Moody’s lead sovereign analyst for South Africa, Lucie Villa, indicated to the media that the agency could cut its rating for South Africa if the nation couldn’t rein in spending, boost growth and improve tax compliance to stabilise its debt ratios.
Intellidex Capital Markets Research’s Peter Attard Montalto said a ratings downgrade next month, at odds of 55:45, was a closer call than in November, although he was cautious not overplay the specific periodic review calendar date of March 27, as it could well happen either side of this, particularly with a mid-March trip from the agency to the country.
“Moody’s downgrading of its growth forecast doesn’t really surprise us, and we think their downgrade view will rotate less on this.
“Still, given that Moody’s will take any small morsel to not downgrade yet, in our view, so we see it as a closerun thing of now versus November – we say it is 55:45,” he said.
NKC Research analysts said Moody’s decision to slash the growth outlook overturned a fledgling recovery in the local unit earlier in the European trading session on the back of China stimulus.
Lukman Otunuga at FXTM
Research said the bigger chunk of on-day losses for the currency were on computer giant Apple warning investors it might not meet revenue targets for this quarter, which is attributed to the coronavirus outbreak hitting production and demand in China.
“The stark warning has quelled investor optimism over monetary policy easing from China and other major central banks, shielding the global economy from the detrimental impact of the virus outbreak.
“Appetite towards the rand was also hit by Moody’s latest decision to downgrade South Africa’s growth forecast,” he said.
He agreed that the rand might tumble even further if the upcoming Budget Speech by Minister for Finance Tito Mboweni failed to tick the boxes with Moody’s, leading to South Africa losing its last investment-grade credit rating status.