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Markets taking Moody's rating review in their stride

Mar 23 2018 13:29
Colleen Goko and Thembisile Dzonzi, Bloomberg

Johannesburg - It’s a rating decision that could trigger as much as $6bn (R70.9bn) of capital outflows from the economy. Investors aren’t batting an eyelid.

South Africa will probably escape a junk assessment from Moody’s Investors Service on Friday, according to 15 economists surveyed by Bloomberg. A downgrade of the country’s local-currency debt would see the nation’s securities exit CitiGroup’s World Government Bond Index, leading to forced selling of government notes by funds that track the gauge.

Traders don’t see much prospect of that, options pricing shows. While the rand’s one-week implied volatility versus the dollar has edged up in recent days, it’s still well below the long-term average. The currency weakened 0.25% to R11.81 per dollar by 12:41 in Johannesburg, bringing its advance since Moody’s placed South Africa on credit-watch negative in November to 20%.

Here’s what investors and analysts are saying about market reaction to the rating review.

Toronto-Dominion Bank

The rand may weaken as much as 3% in the event of a downgrade, says Cristian Maggio, head of emerging-market strategy; it may strengthen as much as 1% from current levels on a decision to hold, while 10-year rand swaps could move up 15-20 basis points on a downgrade, and fall five basis points on no change.

Maggio sees the rand at R11.60 per dollar by year-end and R11.50 in 2019 and sees the South African yield curve dropping 30 to 40 basis points over next two years.

“If they do hold, then I would also expect Moody’s to change the credit watch negative into a negative outlook, which represents a marginally ameliorated situation.”

Commerzbank

The government under the new leadership of Cyril Ramaphosa has improved the political and economic outlook, lessening the chances of a downgrade, economist Elisabeth Andreae wrote in a note to clients.

But risks remain, including a still-large budget shortfall, talk of nationalising the South African Reserve Bank and uncertainty around land reform.

“In the medium term, as with other emerging market currencies, the rand’s performance is likely to be determined largely by global factors. In addition to potential global risk-off movements, the Fed’s upcoming rate hikes and continuing dollar weakness should pose the greatest risks to the rand,” said Andreae.

“We therefore remain cautious about rand exchange rates and have penciled in a moderate depreciation of the South African currency.” Andreae said she sees the rand at R12.80 by end-2018 and R13.50 by end-2019.

Standard Bank

“No change in any rating-agency stance. An upgrade by the others is not an easy path and will take at least 18-36 months of solid economic data for a turn-around,” said Warrick Butler, a Johannesburg-based currency trader at Standard Bank [JSE:SBK].

“The rand is still following the global dollar story. It may be worth a few cents of strength but the market expectations are for a hold anyway.”

Nedbank

“Moody’s will give South Africa the benefit of the doubt even though it is difficult to quantify politics in their model,” said Mehul Daya, a technical strategy analyst at Nedbank [JSE:NED].

Global issues will dictate where the rand goes next even as local developments remain supportive to the currency.

Afrifocus Securities

Market consensus is for no rating change; an unexpected downgrade would dim positive sentiment for Johannesburg-listed stocks, said Ferdi Heyneke, a portfolio manager at Afrifocus.

“If there is no downgrade, South Africa-focused stocks will just keep their steadiness going and then it will be dependent on what happens in the world market.

“That may have been priced in to an extent already.”

Independent securities

A downgrade would be “negative for SA stocks, particularly the banks and possibly the retailers as well, anything that is South African focused,” said Michele Santangelo, a portfolio manager at Independent Securities.

“It will probably be positive for the rand hedges particularly because we might see some weakness in the rand on that announcement.

“A lot of the stocks and the rand are pretty priced in that Moody’s will not downgrade us.

"We could see further rand strength to recent highs of R11.50 per dollar. Financial stocks may rally," said Santangelo.

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moody's  |  markets  |  equities  |  credit ratings
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