Stable SA outlook helps rand gain ground

The rand had one of its best days since the latest sell-off in emerging markets started, surging to a two-week high after a rate hike in Turkey fuelled demand for higher-yielding assets and Moody’s Investors Service signalled it is unlikely to downgrade SA’s debt.

Moody’s, the last major ratings agency with an investment grade on SA’s debt, saw only a “small chance of a ratings move — either up or down — in the next eight months,” Lucie Villa, a senior analyst with the firm’s sovereign risk group, said in Johannesburg on Thursday.

A downgrade by Moody’s of long-term foreign-currency debt into junk status would see the country falling out of key gauges tracked by investors, forcing them to dump more than R100bn of assets. Such a fire sale would cause the country’s bond yields to surge and the rand to extend its 16% decline against the dollar in 2018.

“We think things look fairly stable,” Villa said, adding that the economy, which shrank in the first six months, was likely to eke out positive growth for 2018 as a whole, even if it would be relatively weak at less than 1%.

“The worst is probably behind us,” she said.

The rand gained 2% against the dollar to an intraday best of R14.6196 on Thursday, after the Turkish central bank increased its benchmark interest rate to 24%. That move pushed the lira 2% higher, providing support for other emerging-market currencies.

“What we are seeing is more of a pullback in the rand, rather than a correction, as questions remain about the sustainability of the rally,” said Umkhulu Consulting analyst Adam Phillips.

Growth forecast

“It is more an emerging-market story, driven by one-off events,” Phillips said, although the positive comments from Moody’s helped create a favourable environment for the rand.

Moody’s, which halved its growth forecast for SA last week, still flagged some risks, predicting that the country’s fiscal position would come under renewed pressure as the recession puts pressure on tax collection.

“There was pressure on the fiscus before the economic recession, and there will be even more pressure now,” Villa said.

The public sector wage bill is also set to rise after the government granted above-inflation increases for the next three years. Moody’s expects the wage bill to reach 2.2% of GDP by 2021, from 0.8% in the current financial year.

Finance minister Nhlanhla Nene, who spoke at the same conference later in the day, re-affirmed the government’s commitment to fiscal discipline. “We need to reduce head count in the public sector,” Nene said.

He indicated this was part of a larger commitment to fiscal sustainability, which would stabilise the debt-to-GDP ratio.

The rand also received a boost from a lower-than-forecast inflation report in the US, which lessened the possibility of aggressive rate hikes by the Federal Reserve. That supports emerging-market currencies by maintaining their yield advantage over their US counterpart.

Emerging-market currencies had also “benefited from an improvement in sentiment following reports that the US and China will engage in a fresh round of talks to resolve the ongoing trade dispute”, Rand Merchant Bank analyst Mpho Tsebe said.