Economists on the rand, Covid immunity – and why South Africa’s next ratings downgrade is going to hurt

 ·4 Mar 2021

Rating agencies and global investors were not overly impressed with South Africa’s national budget, casting doubts over the government’s ability to stick to its expenditure targets, say Nedbank economists.

In a research note published this week, Nedbank said that the budget was met with scepticism by Moody’s Investors Service and Fitch Ratings, with both agencies doubtful of the government’s ability to limit spending, especially wages.

Notably, Moody’s said that it still expected gross loan debt to rise to a 100% of GDP by fiscal 2023.

In November 2020, Moody’s cut the nation’s foreign- and local-currency ratings to Ba2, two levels below investment grade, from Ba1. The outlook remains negative.

In the same month, Fitch cut South Africa’s foreign- and local-currency ratings to BB-, three levels below investment grade, also with a negative outlook.

“We still think that the bad news from the domestic front has been largely priced in, but the risks of further rating downgrades remain high as both Moody’s and Fitch left South Africa on negative outlooks,” Nedbank said.

“The next move down the rating scale will hurt, with South Africa then joining Argentina and other nations notorious for disorderly defaults.”

Following the latest downgrades in November, National Treasury warned that continuous rating downgrades will translate to unaffordable debt costs, deteriorating asset values (such as retirement, other savings and property) and reduction in disposable income for many.

“Without any disposable income and increasing costs of goods, it will be difficult to maintain the standard of living. Rating downgrades associated with Covid-19 have also resulted in many small businesses closing down and laying off a number of workers.

“Operational costs together with borrowing costs are expected to increase, supporting the motive to pass through the costs to consumers or further laying off workers,” it said.

Rand showing resilience 

Despite these concerns, Nedbank said that global forces will remain generally supportive of the rand in 2021.

“Rock-bottom interest rates in advanced countries, ample global liquidity due to aggressive quantitative easing and a recovering world economy are likely to drive risk appetites, and capital flows to most emerging market economies.”

“Based on our calculations of purchasing power parity, the rand is about 4% undervalued. If one allows for South Africa’s considerable structural imbalances and underlying inefficiencies compared with our trading partners, the rand is probably fairly valued to slightly overvalued.”

Nedbank said that this does not necessarily imply future rand weakness, as the currency tends to overshoot on the way down and up. However, the outlook is murky and highly dependent on global risk appetite, it said.

“Given that we expect risk-on to prevail, we forecast the rand to hold its value over the year.”

The rand traded at the following levels against the major currencies in the afternoon session on 4 March 2021:

  • R15.04/dollar (0.77%)
  • R18.09/euro (0.30%)
  • R20.96/pound (0.64%)


Nedbank said that economic activity should gain upward traction from February. The pickup was already visible in February’s new vehicle sales. Interestingly, the momentum came from the commercial vehicle market, suggesting a modest improvement in fixed investment activity.

“We expect robust exports, supported by the global recovery and high commodity prices to drive growth in 2021, with some support from a moderate pickup in consumer spending and the restocking of inventories, which were run down during last year.

“Rapid vaccination holds the key to unlocking a faster recovery over the short to medium term.”

On the upside, phase 1 of the country’s vaccination drive has started, but the process appears patchy – held up by vaccine supply bottlenecks, partly caused by planning, administrative and logistical inadequacies within the government, it said.

South Africa has exhausted its first batch of the Johnson & Johnson Covid-19 vaccine in two weeks, with 83 570 healthcare workers vaccinated as of Wednesday.

“We are very encouraged that our first target of exhausting the first batch of 80,000 vaccines from Johnson & Johnson in two weeks has been achieved and exceeded.

“We have taken every opportunity to learn from this process and continue to refine the programme in preparation for the rollout to the larger community in the subsequent phases,” said health minister, Dr Zweli Mkhize.

The first consignment of the single-dose vaccine arrived in South Africa in February, while the second batch arrived this past weekend.

“Even if the rollout goes according to plan, the Department of Health only expects to achieve population immunity by early 2023,” Nedbank noted.

“This suggests that waves of Covid-19 will continue to weigh on economic activity from time to time. Regular power outages will be another disruptor.”

Within this uncertain context, Nedbank said it expects the economy to grow by 3.5%, 2% and 1.7% in 2021, 2022 and 2023.

BNP Paribas South Africa meanwhile, has revised up its Q4 2020 quarterly GDP estimate and pushed up its 2021 growth forecast by 0.5 percentage points to 3.0%.

Jeff Schultz, senior economist at BNP Paribas South Africa, said a still supportive net trade contribution, the temporary extension of state support measures to end April and looser lockdown regulations underpin the changes.

“We still hold a sub-consensus GDP view, as we are unsure of the ability of terms of trade to sustain current momentum alongside still-poor local fundamentals and evidence of more apparent consumer scarring.

“Our upward revisions do not change our view on central bank SARB’s reaction function, and still only expect interest rate hikes in 2022,” he said.

Read: South Africa has pulled itself back from a fiscal cliff – but there are warnings it could teeter again

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