While South Africans prepare to splurge on Black Friday, economists are preparing themselves for a massive financial shock to the system.
This is according to John Cairns, a currency economist at Rand Merchant Bank, who was speaking to Fin24 ahead of expected downgrades by ratings agencies S&P, Fitch and Moody’s on or before Friday, 24 November.
“One local currency downgrade on Friday would push the dollar/rand exchange rate up by between 30 cents and 50c in a rapid spike,” said Cairns.
“This would be a much bigger move than seen after previous downgrades,” he said.
“If S&P and Moody’s both downgrade, then we can expect far greater losses — perhaps even between 50c and 100c. Our market surveys and the pricing on offshore bonds show that downgrades are expected, but this is probably priced for mid-2018 and not as soon as this week.”
According to Cairns the probability of a local currency rating downgrade on Friday evening are at 40% for S&P and 10% for Moody’s. Fitch, which does not release its review dates, is likely to make its announcement within the coming week.
Of the three major ratings agencies, Fitch is currently the only one that has the country in full junk status – where both local and foreign currency debt is rated as sub-investment grade.
S&P has South Africa’s foreign currency debt as junk, with local currency debt one notch above. Moody’s, meanwhile, has both local and foreign currency debt one notch above junk.
The distinction is important, as the majority of South Africa’s debt is held in local currency, meaning at current levels, the country is still holding on. If South Africa is forced into full junk status, this will have a hugely detrimental impact on the economy.
Analysts from Anchor Capital said that, following downgrades, the rand would likely be on its way to R15.00 to the dollar within the year.
At 13h00 PM on Tuesday, the rand was R14.04 to the dollar, R16.54 to the euro and R18.60 to the pound.