Downgrade could strengthen the rand

The rand would be volatile but may strengthen if credit ratings agencies downgrade South Africa to junk status at year-end, says economist Dawie Roodt.

Credit ratings downgrades by the likes of Moody’s, Standard & Poor’s and Fitch loom large for South Africa amid a struggling economy.

Last Thursday, the South African Reserve Bank (Sarb) Monetary Policy Committee (MPC) left interests rate unchanged at 7% but it cut the country’s 2016 growth forecast to 0%.

Economic growth, fiscal debt levels and political stability are variables that ratings agencies look at. But South Africa is struggling in all these areas, Roodt told Fin24.

Subsequently, South Africa’s luck could be up by year-end after the country narrowly dodged ratings downgrades to non-investment grade earlier this year, says Roodt.

“Based on these three variables, I think chances are very good that we’re going to see a downgrade,” Roodt told Fin24.

“Ironically, I think a downgrade will probably lead to an appreciating currency,” he adds.

The rand this year has already strengthened 8% against the US dollar after losing 26% of its value against the greenback in 2015.

While a downgrade could at first lead to a run on the rand, speculators may then eye a buying opportunity for what Roodt says is an “undervalued” currency.

“We have a very, very attractive and very well regulated and liquid financial market, especially the bond market,” Roodt told Fin24.

“So, if you get a downgrade, then institutional investors will probably take the money out of South Africa which will lead to a compression in the currency.

“But immediately the speculators are going to say listen, we’ve got a cheap currency, we’ve got very attractive yields in South Africa – let’s give it a go,” says Roodt.

While the rand could strengthen, the currency may also embark on a wild ride post downgrade.

“So, what we’re probably going to see is a stronger currency after the downgrade – not immediately – but soon afterwards. A stronger currency, but a much more volatile currency,” Roodt told Fin24.

The next round of ratings reviews for South Africa are expected to occur in December this year.

In June, ratings agency Fitch affirmed South Africa’s investment grade credit one notch above junk, but it warned that political and growth concerns should be addressed.

This followed rating reviews by Moody’s in May which affirmed South Africa’s ratings at Baa2/P-2 and assigned a negative outlook. Standard & Poor’s in June also affirmed its BBB- level with a negative outlook for South Africa.

Stats SA announced in June that South Africa recorded a negative growth rate of -1.2% in the first quarter of 2016, sparking fears of an impending recession.

By Gareth van Zyl for Fin24

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