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Rand survives downgrade storm despite warnings of more to come

Jun 12 2017 11:48
Matthew le Cordeur

Cape Town – The rand survived the latest rating agency announcement, which saw Moody’s downgrade both the local and foreign currency rating to Baa3 and maintaining a negative outlook.

Ratings agencies Fitch and Standard & Poor’s recently affirmed the country’s credit rating at BB+. Fitch changed its outlook to stable, and S&P affirmed the negative outlook.

“Both Moody’s and S&P are threatening to take the local credit rating below investment grade and it would need each of them to act once to see South Africa excluded from major global bond indices and generate large capital flight,” warned Rand Merchant Bank analyst John Cairns on Monday.

“The rand, nevertheless, held up very well, with limited losses on Friday and without any indication that there will be further damage today,” he said in a morning note. “Once again this speaks to the rand’s remarkable resilience and again highlights how the natural tendency of the rand at present is to push stronger.”

The rand was 0.42% stronger against the dollar at 11:38 on Monday, trading at R12.89/$.

NKC Research warned that while the government is promising to change course to avert further downgrades, the headlines are telling a different story.

“With all three major credit rating agencies having ruled recently, the same areas of concern are pointed out repeatedly and the government should have no doubt what to focus on next,” it said on Monday in a morning note.

“The problem is that the government’s day-to-day management of the economy is largely misaligned with what is needed and what is often stated in official publications.

“Media headlines, however, tell another story: one of a policy vacuum, with more evidence of state capture, mal-governance in state-owned enterprises and political infighting, that are taking up most of the governing party’s time and attention, to the detriment of the South African economy.

“Hard evidence of improving confidence levels, policy certainty, recovery in economic growth and sound fiscal consolidation measures would be needed to avert more downgrades.”

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