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Rand in the Spotlight as Moody's Reviews South Africa's Credit Rating

 

- On Friday Moody's will review South Africa's credit rating with risks to the Rand

- A downgrade is not expected to an appreciation is possible

- Rise in Rand muted by expectations of a rate cut at next SARB meeting

south african rand exchange rate 1

© Natanael Ginting, Adobe Stock

The Rand will be in the spotlight tomorrow (Friday) when Moody's credit rating agency pass judgement on South Africa's (SA's) ability to meet its debt obligations.

The main risk for the South African Rand lies in a downgrade of its credit rating because the country is only one notch above junk status so a downgrade would mean the loss of 'investment grade' debt status and a fall to 'junk'. This would trigger the removal of SA from, "Citi's influential World Government Bond Index (WGBI), triggering up to R100-billion ($8.3-billion) in selling by foreign investors," according to Reuters.

Foriegn investment is a major driver of currency appreciation so a downgrade would be catastrophic for the Rand.

The review comes after SA narrowly avoided a downgrade in November 2017. Moody's decided to give the country one last chance and placed it on review pending a re-rating in March. We have now reached that date.

Moody's is the last of the big three credit rating agencies to keep SA one notch above junk status and so a downgrade from Moody's, the largest agency, would be the final goodbye.

Luckily for the Rand there have been many changes in SA since November, including the removal of President Jacob Zuma who was seen as a major impediment to reform, government financial consolidation and the reform of the central bank, and it is now expected that Moody's will decide not to downgrade it's credit rating. 

A recent Reuters poll, for example, showed that 16 out of 18 Economists said they did not think Moody's would downgrade South Africa on the 23rd.

Analyst Elisabeth Andreae of Commerzbank also agrees that a downgrade is unlikely, yet she does not see the Rand rising by much as result, partly because the event and its outcome have already been so widely telegraphed that the news has already been discounted by the Rand, which has already risen substantially in anticipation.

Yet the Rand's enduring strength means it now faces fresh headwinds from a possible interest rate cut due to falling inflation. The South African Reserve Bank (SARB) meet to discuss policy on Wednesday, March 28, and are widely expected to cut interest rates from 6.75% to 6.50%. Lower interest rates tend to attract less capital inflows as they don't promise as high returns for investors.

"Surprisingly low inflation of late has fuelled rate cut expectations. Overall, this argues for muted rand appreciation in case of a positive rating verdict," says Andreae.

As such there is a risk that the most highly anticipated event of the calendar for the Rand may actually end not in a bang but a whimper for markets, as the Rand may already be ahead of the game.

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