Rand suffers another blow as downgrade looms

The rand came under further pressure in mid-day trade on Thursday (31 October), after a Bloomberg report said that China is doubtful of a long-term trade deal with the US, spooking the markets on Halloween.

The local unit slipped to R15.19 against the dollar and is some 3.75% lower than its opening level on Wednesday morning, noted Peregrine Treasury Solutions. It made a minor recovery, to R15.11 by 12h55.

The rand previously came under pressure on Wednesday, weakening as much as 2.5% against the greenback and breaching R15.00 against the dollar after finance minister Tito Mboweni delivered a sobering Medium-Term Budget Policy Speech (MTBPS).

“While the MTBPS offered little clarity on the reforms we can expect in the 2020 budget, the increasing state debt burden and growth adjustment saw the rand wipe out all of its recent gains,” said Bianca Botes, treasury partner at Peregrine Treasury Solutions.

“The 25 bp Fed interest rate cut also did little to appease the market, as the rand barely flinched,” Botes said.

National Treasury said on Wednesday that the budget deficit is expected to widen to 6.2% of the Gross Domestic Product (GDP) in 2020. According to Treasury’s Budget Review document, this is mainly due to tax revenue shortfalls, lower economic growth and the Eskom bailout.

Mboweni said he expects the economy to grow at a rate of 0.5% in 2019 – which is a downward revision from the 1.5% that was projected in the February budget.

“It is our job to chart a course that is strategic, sober, careful and inclusive. The economy is now forecast to grow at 0.5 % in 2019 compared to the 1.5 % expected in February,” he said.

What’s next?

South Africa’s debt pile is increasing fast, economic growth is weak and there’s a lack of progress turning around the ailing state-owned electricity company, Bloomberg reported. That raises the risk the country will lose the stable outlook on its last investment-grade rating with Moody’s Investors Service.

Moody’s Investors Service is due to review South Africa’s score this week and is the only major ratings company to still assess it at investment grade.

A switch to a negative outlook could be the precursor to a downgrade that would increase borrowing costs and trigger massive investment outflows at a time when the country relies on portfolio investment to finance its current-account deficit, Bloomberg said.

Foreign investors sold a net R3 billion ($198 million) of South African bonds on Wednesday, the biggest daily outflow in almost two months.

“The bottom line is that South Africa’s fiscus is in dire straits,” Nema Ramkhelawan-Bhana, a Johannesburg-based analyst at Rand Merchant Bank, said in a client note.

“The downward revisions to budget forecasts are testament to the country’s economic and fiscal stress – a reality for investors with interests in SA; their pessimism was expressed through the sell-off in the local currency and bond market.”

Momentum Investments said in a flash note that Moody’s could downgrade South Africa’s credit rating outlook because of a hefty fiscal slippage.

“The rapid fiscal deterioration projected in the MTEF that causes SA’s debt ratio to continually drift higher in the medium term could entice Moody’s rating agency to seriously consider moving the country’s credit rating outlook from stable to negative, followed by a rating downgrade to junk later in 2020 or in 2021 if no fiscal recourse is evident by then,” it said.

It said that a rating downgrade could be averted if the February 2020 budget provides clear evidence that government is credibly pursuing its newly-announced fiscal target of attaining a primary budget balance (excluding Eskom financing and interest expenditure) by FY22/23.

This, it said, will necessitate cutting the public wage bill and instituting additional tax measures to generate the forecasted R150 billion required improvement in the fiscal balance in the period.

“Moody’s already includes Eskom’s government-guaranteed debt under the country’s debt, hence there should not be a negative impact on the rating from any future government move to take Eskom’s debt onto its balance sheet,” Momentum Investments said.

Bloomberg wrote that Eskom will receive R138 billion in bailouts through March 2022, or R10 billion more than previously allocated. Minister Mboweni on Wednesday warned that extra support may be needed if plans to turn the loss-making utility around are delayed.

That means South Africa’s government debt will top 70% of gross domestic product in the next three years and may continue rising as bailouts for state-owned companies boost spending, according to the National Treasury. The ratio was previously projected to rise to 60.2% in 2024, before decreasing in subsequent years.

The rand traded at the following levels against the major currencies:

  • Dollar/Rand: R15.11  (0.66%)
  • Pound/Rand: R19.57  (1.11%)
  • Euro/Rand: R16.87  (0.80%)

Read: Moody’s should downgrade South Africa if it wants to be taken seriously: economist

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Rand suffers another blow as downgrade looms