Seattle - The rand may weaken another 16 percent from current levels should South Africa’s credit rating be downgraded to junk under President Jacob Zuma’s leadership, according to Gryphon Asset Management’s Abri Du Plessis, who helps manage the equivalent of $236 million in Gryphon-branded funds.
“If we do not change the Zuma regime, then I think we’re going to see a downgrade somewhere in the year,” Du Plessis said in a January 12 interview for Bloomberg Brief’s sub-Saharan Africa newsletter. “And in that instance, the rand can easily go to 20 against the dollar.”
Zuma, 73, roiled markets and sent the rand to record lows in December by firing Finance Minister Nhlanhla Nene and replacing him with a little-known lawmaker, raising questions about his commitment to fiscal targets. Zuma reconsidered four days later and re-appointed Pravin Gordhan, who had served as finance minister from 2009 to 2014. The currency, which fell to a record of 17.9169 per dollar on January 11, weakened 0.5 percent to 16.8724 by 5:40 p.m. in Johannesburg.
Standard & Poor’s cut the outlook on South Africa’s BBB- credit assessment to negative from stable last month, indicating it may downgrade the nation’s debt to junk. Fitch Ratings has an equivalent reading of BBB- with a stable outlook, while Moody’s Investors Service has South African debt one level higher at Baa2. The slump in commodity prices, accelerating inflation and concerns about global growth are also weighing on the rand.
If the country were to avoid a downgrade, the rand would likely trade around 17-17.50 per dollar, Du Plessis said, adding the only way he could see that scenario happening would be if Zuma stepped back and the ANC’s old guard took over.
He expects China to slow even more than expected, weighing on commodities and causing inflation to quicken in net-importer South Africa. In turn, the South African Reserve bank will be forced to raise interest rates substantially this year, stunting any economic growth, Du Plessis said. He forecasts a 50 basis point rate increase at the January meeting and another 75 basis points worth of hikes in the rest of the year.
“The rand is not going to improve under these circumstances so my best asset class from a South African investor point of view would be as much offshore cash as possible, in particular the dollar,” Du Plessis said. “I would take maximum dollar cash exposure and the risk that I have to have in the local markets, I would just have in local cash. I’m a big bear.”