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'Hold onto your hats' for rand slump in wake of Moody's downgrade – analyst

Mar 28 2020 15:25
Marelise van der Merwe

The rand will likely breach R18$ on Monday following the decision by Moody's to cut South Africa's credit rating to junk, an analyst has warned.

Bianca Botes, Treasury Partner at Peregrine Treasury Solutions, said on Saturday that South Africans should "hold onto [their] hats".

"While the global currency market was closed, we will only see the reaction to the news once trading resumes on Monday. Although the rebalancing of the World Government Bond Index (WGBI) has been postponed to end April, a selloff in the region of $11bn is expected," she warned.

"Hold onto your hats on Monday, the rand will in all likelihood be setting its sights on breaching R18.00/$."

South African government bonds will automatically be excluded from the major FTSE World Government Bond Index as the result of the decision, Fin24 previously reported, meaning the government bond market will experience further capital outflows as fund managers with investment grade mandates will be forced to sell South African government bonds.

While not entirely unexpected – the Moody's downgraded South Africa's outlook to negative late last year – the rating downgrade drew a deeply concerned response from Treasury in the early hours of Saturday morning.

'Trembling'

"While some market participants argue that the impact of a sovereign downgrade has already been priced in, it is difficult to stipulate with certainty the extent.

"Therefore, to say we are not concerned and trembling in our boots about what might be in the coming weeks and months is an understatement," Finance Minister Tito Mboweni in a statement on Friday evening. 

In a statement on Saturday, business body Business Unity South Africa said the decision had come at a very "unfortunate time", when the country was struggling to contain the human and economic cost of the coronavirus pandemic.

"The cost of capital will structurally increase, not only for government, but for all people and businesses. The South African economy was experiencing recessionary-like conditions even before the impact of Covid-19 pandemic and its citizens do not save enough for the country to finance its own development needs," it said.

"South Africa is reliant on borrowings from domestic and international markets for the funds needed by government for services and investment. This is why ratings are important."

Priced in?

While SA's government bonds do already trade at levels of non-investment grade countries, BUSA added, the cost of credit for all South Africans will be structurally higher than otherwise, meaning the impact will be seen in future budgets and government spending – even if, as has been suggested, the downgrade has been "priced in".

BUSA also believes the ratings of the country's banks will likely be downgraded in the near future.

"The higher cost of capital will hamper the feasibility of sustainable infrastructure projects and commercial business ventures that are necessary for higher levels of inclusive economic growth," it said, noting that the country was at the start of a "hard journey of many years".

Trade union federation Cosatu – which has already called for a government stimulus package to fight the coronavirus – said on Saturday afternoon that the decision to downgrade was "not surprising" as the economy had been "stagnant for some time".

Saying the federation feared further job losses and an "economic firestorm" loomed, spokesperson Sizwe Pamla called for aggressive interventions from both government and the private sector, including a further interest rate cut, additional relief for workers from the Unemployment Insurance Fund, and a three-month payment holiday on all loans.

The federation also called for public servants to receive a wage increase that has been the subject of much debate since Finance Minister Tito Mboweni announced during his Budget speech the intention to save some R160 billion on the public sector wage bill over the next three years.

According to Cosatu, the salaries and perks of Ministers, Deputy Ministers, and the senior management of the SOEs, state entities and public service and municipalities should be slashed instead.

rand  |  economic growth  |  moody's
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