Budget 2023
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Rand hits 11-month low as rating downgrade fears intensify

Cape Town – The rand weakened to an 11-month low following Finance Minister Malusi Gigaba’s mini budget speech, as rating downgrade fears sparked a sell-off of the local currency.

While the speech painted a dire state of South Africa’s finances with no solutions to change course, some analysts believe rating agencies will only take action after the ANC’s elective conference in December.

That didn’t stop the market from sending the rand on a downward spiral, moving from R13.75 at the close of business on Tuesday to a low of R14.26 to the dollar on Thursday. By 10:45, it was trading 0.9% lower at R14.18/$.

“The budget is credit-rating negative, with the probability of a downgrade to sub-investment grade before year end being higher than before,” said Rand Merchant Bank analyst Isaah Mhlanga in a note to investors.

“But we think that rating agencies will wait for the ANC National Conference in December before they move.”

Treasury expects the economy to expand 0.7% this year, down from 1.3% predicted in the February budget, and trimmed its growth forecasts for the next three years. Tax revenue for this fiscal year will fall R50.8bn short of the initial forecast.

Lower growth and revenue will feed through to a higher budget deficit. The gap is expected to jump to 4.3% of gross domestic product in the current fiscal year, up from a projected 3.1%.

Rand will strengthen again

TreasuryOne dealer Gerard van der Westhuizen told investors in a note that the market seems to be a bit “overdone” and expects a reverse movement to between R13.80 and R13.95.

“The main risk following yesterday is the increased probability of a downgrade of our local currency rating before the December ANC conference,” he said.

“Both S&P and Moody’s still have our local rating at investment grade and after the extensive spike in the rand yesterday it could be that the market is starting to price in the possibility of a November downgrade by jumping the ship before it hits the rocks.”

Phoenix Kalen, an emerging-market strategist at Societe Generale in London, told Bloomberg that although it is of some small comfort that the Treasury brought realism into its projections, he said South Africa faces alarming consequences in growth, fiscal performance, and financial market stability stemming from possible credit rating downgrades.

“Although there may be a slight bounce after today’s sizeable slide, the bias on the rand is for further weakness in the lead-up to the December ANC conference.”

Rating downgrade all but guaranteed

If the rating companies “don’t do anything after today they are frozen behind the wheel”, George Herman, chief investment officer at Citadel Investment Services in Cape Town, told Bloomberg by phone.

“The ratings downgrade is now all but guaranteed, it’s just a matter of them saving face and deciding when to do it.”

Gigaba and his team spoke to rating agencies on the phone on Wednesday after the budget speech and will meet with the firms next week, Deputy Finance Minister Sfiso Buthelezi said.

“I pray that doesn’t happen,” he said in an interview, referring to the chances of a cut in the local currency rating.

“Obviously, we never know what goes through their minds. From our side what we can do is explain our story and hope that because of the things we have done that our story will be credible. We did everything that we could.”

The fiscal forecasts are a “worst-case scenario” and revenue options are being considered, he said.

“Fiscal consolidation plans seem to have been largely abandoned,” Jeffrey Schultz, an economist at BNP Paribas in Johannesburg, said by phone.

“We believe that not enough was done to instil confidence that fiscal consolidation remains front of mind for the Treasury and as such I think ratings downgrades by S&P and Moody’s and Fitch are inevitable before the end of the year.”

* Visit our Mini Budget Special Issue for all the news, views and analysis.

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