Rand reels as junk status hits Brazil amid Gordhan's budget

2016-02-24 18:00 - Matthew le Cordeur and Liesl Peyper
(Picture: AP) ~ AP

Cape Town – In the midst of Finance Minister Pravin Gordhan’s budget speech on Wednesday, Moody's downgraded Brazil to junk status, which is seen as the main cause for the weakness in the rand.

TreasuryOne said the rand’s almost 3% decline in daily trade was as a result of Moody's downgrading of Brazil, which it believes will record average negative growth for the next three years.

The currency started the day somewhat firmer at R15.21/$, but gradually ran out of steam, dipping to as low as R15.66 by 16:17 earlier this afternoon.  It also traded lower against other major currencies – at R17.11/€ and R21.69/£.

Most analysts and economists felt the rand’s depreciation signalled a negative interpretation of Gordhan’s budget. South Africa is also facing a downgrade to junk status, which happens when a ratings agency downgrades a country’s bonds to non-investment grade.

NKC analyst Bart Stemmet said Gordhan did not do enough to stave off a rating downgrade to junk bond status in the coming months.

“The steep exchange rate depreciation shortly after the budget was released suggests that the market agrees,” said Stemmet.

Overberg Asset Management director Brett Birkenstock said the markets are “questioning whether Gordhan has done or been allowed to do enough to avoid a downgrade”.

“The rand reacted sharply and one can feel that what was missing from the budget was more cuts to government expenditure, more mention of privatisation of state enterprises and a clear move to ignite the economy. In a way, we are still suffering the hangover from the infamous ‘Nenegate’,” he said.

Adam Phillips of Umkhulu Consulting said the jury is still pontificating on a possible rating cut. “They wanted him to be more courageous,” he said. “It is clear that Gordhan is going to need the cabinet to abide by the rules in order to tighten the belt. International investors wanted more given what has happened in the last three months.”

Marc Joffe, CEO of Global Credit Ratings said the rating agencies will digest Gordhan's comments and “stringently assess the realism and ability to implement the new initiatives”.

The DA’s David Maynier said Gordhan “hasn’t done enough” to avoid a sovereign ratings downgrade. “The ratings agencies are monitoring several risk areas, including economic growth, fiscal consolidation and the financial position of state-owned enterprises. Especially measures to boost economic growth and create jobs were lacking.”

Birkenstock said that while Gordhan’s speech was good, it stung of controls and restrictions being placed on Gordon from government. “He has not been given a free mandate.”

Kirk Swart of Overberg Asset Management said not enough was done to ease investors’ worries of a slowing economy. “Raising sin taxes won't help in boosting the economy,” he said. “We expected more in terms of the selling of state assets. Extra levy on fuel will only act to brake economic growth.

“The drop in fuel prices was a catalyst for growth. However, by increasing the fuel levy the low fuel prices can’t be the catalyst for growth. This will lead to further food inflation.”

Stemmet said South Africa’s economy is grinding to a halt and the scope for a significant rebound is slim.

“While Mr Gordhan has restored some faith in the National Treasury following the rapid-fire axing of his predecessors in December, and the market crash that ensued, South Africa is still on course for a rating downgrade if deep structural reform is not accelerated markedly.

“The National Development Plan was again proffered as the guiding light to get the economy out of the mess it finds itself in, and those expecting more were left underwhelmed.”

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