South African Rand Outlook "More Favourable" Following Moody's Rating Call

Ramaphosa and the Rand

Above: With Moody's affirming South Africa's sovereign debt at investment grade, the next hurdle for the Rand is South Africa's looming election. Image © Government of South Africa, reproduced under CC licensing

The South African Rand is seen outperforming its peers on global currency markets in light of Moody's decision to affirm South Africa's sovereign debt rating at investment grade. 

Moody's has today affirmed South Africa's sovereign ratings at Baa3 - the lowest investment grade rating - with a stable outlook.

But, the currency had already risen 2.0% ahead of the announcement by Moody's suggesting the call was already absorbed by currency market traders. Moody's were actually supposed to have released their decision on Friday, March 29. 

Markets read the delay by Moody's as an affirmation of South Africa's rating, and the Rand rallied as a consequence.

Markets were concerned that Moody's might drop South Africa's rating to a negative outlook, and the Rand's rally is therefore one built on relief. The Pound-to-Rand exchange rate currently trades at 18.55 but had been north of 19.00 ahead of the ZAR bounce fuelled by Friday's ratings decision delay. The U.S. Dollar / Rand exchange rate is quoted at 14.24, but had been as high as 14.48 ahead of the review.

We are however told that the outlook for the currency has improved somewhat on the back of the call by Moody's.

"We have now moved on to a more favourable path for ZAR trading," says Cristian Maggio, Head of Emerging Markets Strategy at TD Securities. "On 29 March, Moody's released no official statement on South Africa. The market had interpreted Moody's behaviour as an affirmation of South Africa's ratings, and the Rand rallied as a consequence. In hindsight, this view has proved correct."

Maggio explains the early scheduling of rating reviews is an EU mandatory requirement for all sovereign ratings assigned to EU-based entities, or when the analysts reside within the EU borders. With Moody's primary analyst based in France, South Africa falls under this rule.

According to the analyst any last minute changes to a ratings release schedule are not very common and it is standard practice for announcements to be made after market close on Fridays so to minimise any knee-jerk market reaction.

Moody's say South Africa's "credit profile is supported by a diversified economy, a sound macroeconomic policy framework and a deep pool of domestic investors thanks to well-developed financial sector and markets."

An investment-grade rating matters as it allows foreign institutions to buy South African bonds, which in turn provides a strong demand for ZAR. When an instrument is relegated to sub-investment grade many investors are obliged to automatically sell their exposure to maintain acceptable risk exposure.

Working against the country's investment status is an "elevated government debt" and "contingent liabilities risks" from State-Owned Enterprises. Moody's also mentioned "persistently low growth" as a structural constraint.

There were concerns that South Africa's lacklustre economic performance of recent months, and the substantial financial liability that is posed by the country's electricity supplier Eskom, would lead to a downgrade by Moody's.

Maggio says the outlook for South Africa's sovereign rating, and by extension the Rand, are all now reliant on politics with elections looming large.

"South Africa's future ratings will mostly depend on the forthcoming political cycle, starting with the elections," says Maggio. TD Securities say a best-case scenario would see the ruling ANC party win a comfortable majority that would allow President Cyril Ramaphosa implement market-friendly economic reforms.

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