Cape Town - A slump in the value of South Africa’s rand is unlikely to negatively affect the nation’s credit rating, Moody’s Investors Service said.
The rand weakened as much as 0.6 percent to 10.8353 against the dollar yesterday, the worst intraday level since October, 2008 on speculation that the Federal Reserve will end debt purchases this year.
The currency has dropped 2.8 percent this year, extending its 19 percent slump in 2013.
“The South African exchange rate doesn’t pose a significant credit risk for the sovereign because the government intentionally has a relatively small exposure to foreign- currency denominated debt,” Kristin Lindow, a senior vice president at the ratings company, said in an e-mailed response to questions.
“Likewise, the Reserve Bank’s determination not to intervene to try to affect the level of the rand exchange rate means that the volatility is not a risk for the foreign reserves, which is credit positive.”
Moody’s lowered South Africa’s rating in September 2012 to Baa1, the third-lowest investment-grade level, with a negative outlook, as economic growth slowed and the government’s budget deficit widened.
Standard & Poor’s and Fitch Ratings have a BBB assessment on the nation’s debt, one level below Moody’s.
“The continued rise in government debt levels is a factor behind the negative outlook,” Lindow said.
“However, the depreciation of the rand will not meaningfully affect the Treasury’s ability to rein in the deficit.”
The rand was little changed at 10.7978 per dollar as of 9:18 a.m. in Johannesburg.
Gross government debt will rise to 44.8 percent of economic output this fiscal year and 47.7 percent in 2017 before stabilising, the Treasury predicted in October.
The rand’s slump may boost the competitiveness of the nation’s exports.
Annual growth in manufacturing output slowed to 0.3 percent in November from 1.7 percent the month before.
“Many of the country’s exports are dollar-denominated, so the depreciation results in increased local currency-denominated income,” Lindow said.
“Historically, for example, we have seen corporate profits improve after a steep fall in the currency.”
In a report issued January 6, Lindow said South Africa’s rating will probably remain at the Baa investment-grade level “for the foreseeable future.” - Bloomberg News