Rand slips as greylisting reality sets in

South Africa gave up the gains it made following finance minister Enoch Godongwana budget speech on Wednesday.

Following the budget, where the minister announced that the government would take on more than half the debt of the failing national power utility Eskom, the local unit staged a rally, trading stronger on the news.

The National Treasury proposed a total debt-relief arrangement of R254 billion for Eskom – the primary driver for low economic growth in the country.

As stated in the budget, the relief will be provided in two parts: R184 billion will cover Eskom’s full debt settlement requirement over the medium term, while R70 billion will be a direct take-over of Eskom’s loan portfolio in 2025/26.

This debt relief means that Eskom will not need to borrow any further during this period.

Around the time of the announcement, the rand traded at R18.17/$, about 0.42% stronger than its previous close. Earlier in the day, before the budget speech, it had hit R18.38/$, its lowest since November.

However, in afternoon trade on Thursday, these gains had been lost, with the currency weakening to R18.34 to the dollar.

While markets welcomed the long-awaited answer to the utility’s debt, the reality of South Africa’s economic fundamentals and the looming greylisting by the Financial Action Task Force (FATF) on Friday kept things muted.

During his budget speech, Gogongwana said that the country should be prepared for the possibility of being greylisted.

In the budget itself, National Treasury said that “over the longer term, government has asked the FATF to formally reassess South Africa’s compliance during its June 2023 plenary”.

This advance alert for another review has been taken by some investors to mean that a greylisting is now likely, and even expected by the government.

Investec’s chief economist Annabell Bishop also noted the Eskom debt relief negatively impacts the country’s debt ratio.

“Gross debt of the government is consequently now projected to stabilise at 73.6% of GDP in 2025/26. Previously the projection was estimated to peak at 71.1% in 2022/23,” said the economist.

South Africa’s currency is still at the whim of domestic growth estimates and a possible credit downgrade, she added.

According to Bishop, the key credit rating agencies (Fitch, Moody’s and S&P) already rate South Africa’s debt as including all Eskom and other state-owned entity debt, which government holds guarantees over, and so the impact should be credit neutral.

Global ratings agency Fitch, as stated by Bishop, said prior to the national budget speech that low growth potential at 1.2% remains a key credit weakness, a further weakening of trend growth or a shock that further undermines fiscal consolidation efforts that could result in a negative rating action.

“There is some headroom at the sovereign’s rating of ‘BB-‘ to absorb a temporary impact on economic metrics from load-shedding, but a failure to address the problem over the medium term could add to downward pressure on the rating,” said Bishop.

She said that in the budget, there were some improvements in fiscal projections.

The budget deficit for 2022/23 lowered to -4.2% of GDP, dropping from the previous estimate of -4.9% of GDP.

It is expected to reach -3.2% by 2024/25.

“The downward revision of the National Treasury’s economic growth forecast for 2023 to 0.9% y/y from 1.4% y/y is in line with the consensus once a couple of outliers are removed. 2024 sees a slight drop to 1.5% y/y from 1.7% y/y.”

This has only a mild effect on the fiscal ratios, while the overall improvement is that a primary surplus occurred earlier, in the current fiscal year, instead of in 2024/25, Bishop said.

The rand is currently trading at:

• Dollar: R18.34/$
• Euro: R19.44/€
• Pound: R22.07/£

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