A tough week lies ahead for the South African economy, with the rand sinking to just under R15.80 to the dollar on Monday as the country waits for Friday’s verdict on whether it will be downgraded to junk or not.
Credit rating agency Standard & Poor’s is expected to release its assessment of South Africa on Friday 3 June, in which it will announce whether it will cut the country’s rating to junk.
By 12h00 on Monday afternoon, the rand was trading at R15.78 to the dollar, having opened the week at R15.71.
S&P, along with Fitch ratings, have South Africa at one notch above junk status, with the former setting its outlook to negative, increasing the chances of a downgrade.
Economists are split on what will happen: while many expect a downgrade to happen in 2016, it is seen as more likely to happen at the end of the year.
Following Moody’s keeping the country’s rating at two notches above junk earlier in the year, some have been more optimistic that the country can avoid the cut, with hopes of a short-term reprieve.
Other economists have warned, however, to expect the worst.
The local currency has been battered by mixed sentiment around the potential downgrade, compounded by fluctuations in the global market – pushed around largely by the performance of the dollar.
“When the upward revision to US Q1 real GDP growth rate came in, the South African currency knee-jerked weaker,” analysts at NKC African Economics said in a note.
“The higher estimate for economic expansion during 1st quarter in world’s largest economy provides more justification for those calling for a hike by US Fed in June.”
With lingering uncertainty on all fronts, the rand is not expected to show any strong recovery over the next few days, with a negative result on Friday likely to tip the currency over the edge.
Junk status for South Africa would push the country’s debt costs higher, and would prevent investors and hedge funds from investing in the country – many of which are prevented by policy from doing so.
In the short to medium term, a downgrade would push the South African rand even higher against the dollar – as seen in markets such as Brazil – which in turn would put even more pressure on South African consumers who are already stretched to their limit.
S&P will make its announcement on Friday 3, June, with Fitch expected to follow a week later.