Rand Extends Gains as Ramaphosa addresses the Nation but Ratings Agencies Give Cool Response

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S&P Global Ratings says recent events do not warrant a review of its already-downgraded score for South Africa's debt while Moody's, yet to announce its latest rating decision, is staying mum. 

The Rand extended its gains Friday as South Africa prepares for the inaugural State of the Nation address from President Cyril Ramaphosa, although the response of ratings agencies to a changing of the presidential guard has been tepid so far.

South Africa’s currency reached new three year highs against the US Dollar Friday as markets bet Ramaphosa’s prescription of reforms will be enough to return the economy to growth and save the nation’s investment grade credit rating from the axe.

Friday's price action comes after former-President Jacob Zuma stepped down Thursday following nine scandal plagued years in power.

Zuma leaves behind a dented international perception of South Africa as an investment destination, a barren public purse and a strained economy that has only recently left a proverbial intensive care unit.

The USD/ZAR rate was quoted 0.01% lower at 11.61 during noon trading in London Friday while the Pound-to-Rand rate was 0.29% lower at 16.32.

“The new leadership could bring confidence and faster implementation of key reforms already undertaken,” says Gardner Rusike, a credit analyst at S&P Global Ratings, in a recent bulletin.

“However, Mr Ramaphosa and his administration will require time to design and implement measures to improve economic growth and stabilize public finances, given the structural and institutional challenges that South Africa faces.”

S&P lowered South Africa’s long term local currency sovereign credit rating from BBB- to BB+ in November, taking it out of the investment grade category and leaving it at a level that is colloquially known as “junk”. It cited a range of factors as being behind its decision, most of which are still relevant.

“Economic growth remains low, impeding the path to fiscal consolidation. We think the government will attempt to introduce offsetting measures in an effort to improve budgetary outcomes, but these may not be sufficient to stabilize public finances in the near term,” Rusike wrote in a briefing Thursday.

S&P Global concluded Thursday that recent events do not warrant a change, or formal review, of its already-downgraded rating. 

Moody’s, which is the only agency to still rate South African debt as investment grade, didn’t respond to a request for comment on Friday.

The agency said in December that the “new ANC leadership gives prospect of a credit positive policy shift,” but noted that a narrow victory for Ramaphosa could complicate efforts to reform the country.

Moody's put South Africa on review for downgrade in November last year and is due to determine whether it will withdraw South Africa’s investment grade credit rating in March, citing similar concerns to those of S&P. 

A loss of investment grade status at Moody’s could be devastating for South Africa as it would see many institutional investors forced into selling their government bonds.

This would push South African borrowing costs higher and put downward pressure on the Rand once again as foreign investors flee the country.

For South Africa, much still rests on whether the Treasury can use next Wednesday’s budget statement to set out a credible plan for bringing down South Africa’s budget deficit, which is expected to have topped 4% of GDP in 2017.

A cabinet reshuffle will also be key to inspiring confidence among investors, and presumably ratings agencies, going forward.

“There are several events to watch going forward," says Adam Cole, head of FX strategy at RBC Capital Markets.

"(1) the 2018 Budget announcement on February 21, which we expect to drive ZAR’s risk premium higher, (2) a cabinet reshuffle, including the potential replacement of FinMin Gigaba, and (3) the Mining Charter Review (February 19-21), which we expect will yield some positive developments but not enough to offset the downside risks from the Budget.”

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