Johannesburg - The rand strengthened by 2 percent yesterday after ratings agencies affirmed South Africa’s investment grade credit rating, while emerging equities rose to a two-week high, helped by a retreat in the dollar and US bond yields.
The rand firmed to 13.8 against the dollar, its strongest in nearly three weeks, after South Africa avoided downgrades from Fitch and Moody’s last Friday.
The rand opened at R1403.38, reaching R1375.24 before settling at R1382.14 by 5.30pm.
Fitch rates the country one notch above “junk”, while Moody’s has the sovereign two levels above sub-investment grade. A downgrade to junk status would increase borrowing costs and potentially trigger an exodus from local stock and bond markets.
But both ratings agencies warned that political risks could hamper growth and impede reforms, with President Jacob Zuma facing a no-confidence vote by the ruling party’s executive committee later in the day.
A downgrade could see the rand weaken to 14.5 against the dollar, but if South Africa avoids this, then the rand could strengthen a little further to 13.5, said Jakob Christensen, the head of emerging markets research at Danske Bank, adding that the market was waiting to see what S&P would do.
The Organisation for Economic Co-operation and Development (OECD) yesterday warned that South Africa had no fiscal space due to the continued increase of government debt and higher borrowing rates in the context of persistent low growth.
In its twice-yearly global economic outlook, the OECD said fiscal policy was under pressure from the risk of a ratings downgrade and the government needed to stick to its consolidation path and improve the effectiveness of spending and investments.
The OECD said economic growth was projected to rebound next year and strengthen further in 2018, driven by household consumption and investment. In particular, the improvement in electricity production removes bottlenecks and should boost confidence and therefore investment, provided that political uncertainties dissipate. Rising production costs, together with the earlier rand appreciation should weigh on exports.
The Paris-based organisation said South Africa’s macroeconomic situation was still difficult as growth was weak and inflation was above the Reserve Bank’s target.
“Falling inflation will create scope to ease monetary policy. However, scope for easing may be limited in the short term as the persistent drought is driving up food prices. Lifting barriers to competition and favouring the development of (small and medium enterprises) could boost productivity, employment and living standards. Unless growth accelerates, however, unemployment and inequality will remain very high.”
The OECD said for the last five years, the global economy had been in a low-growth trap, with growth disappointingly low at about 3?percent a year. It said persistent growth shortfalls had weighed on future output expectations and thereby reduced current spending and potential output gains. The OECD, which works with more than 100 countries, however, said global growth would pick up faster than previously expected in the coming months as the Trump administration’s planned tax cuts and public spending fire up the US economy. It estimated global growth would accelerate from 2.9 percent this year to 3.3 percent next year and reach 3.6 percent in 2018. The OECD was slightly more optimistic about the US outlook, with a forecast for growth next year of 2.3 percent, up from 2.1 percent in its last set of estimates dating from September.
* With additional reporting by Reuters