Johannesburg - The rand weakened to a two-month low last Friday as risk markets retreated after US Federal Reserve chairwoman Janet Yellen signalled an interest rate hike was imminent.
The pressure on the rand comes as the country awaits ratings agency Moody’s to pronounce on its review on the country’s rating on Friday.
While the SA Reserve Bank has in the past been seen to be taking its cue from the Fed, this week it is expected to differ with Yellen and keep interest rates unchanged at 7 percent when it announces its decision on Thursday.
Such a decision could put pressure on the rand as investors have braced themselves for a US hike next month.
Peter Attard Montalto, an emerging market analyst at Nomura, said: “In this weak growth environment with long-end inflation on target and expectations stable, if at a concerning pace for the (SA Reserve Bank), we believe there is a minimal chance of a move in rates in either direction at this meeting.”
Contraction
The economy is forecast to expand at the slowest pace this year - at 0.5 percent - since a 2009 recession, delaying the government’s plans to narrow the shortfall on the budget and rein in debt.
John Cairns, a currency strategist at Rand Merchant Bank, said recent data had suggested that the economy contracted in the third quarter.
“The monthly mining, manufacturing, trade and retail sales data that we have received for the third quarter suggests the economy contracted mildly in the quarter, that is a negative quarter on quarter seasonally adjusted growth rate,” Cairns said.
Consumer price index (CPI) inflation is forecast to have receded to 6 percent in October against 6.1 percent in September and is expected to average 6 percent in the final quarter.
Kamilla Kaplan, an economist at Investec, said the moderation in the producer price index (PPI) inflation and the Reserve Bank’s projection of CPI inflation returning to the target range next year, provided room for the bank to keep interest rates unchanged.
Investors are worried that the country could see its credit rating lowered over the weak economic growth and political skirmishes that have called the independence of key departments into question.
Moody’s ranks South Africa two notches above junk.
S&P Global Ratings is scheduled to announce its assessment, which is at the lowest grade and has a negative outlook, on December 2.
Officials from Fitch Ratings, which has a stable outlook on its BBB- rating, visited South Africa last week and raised concerns about the country’s ability to stick to its fiscal targets and about the lack of economic growth, according to Deputy Finance Minister Mcebisi Jonas.
“We will be able to maintain the current expenditure ceiling, we think we will, and I dare say, we convince them we can,” Jonas said last Thursday.
“My sense is that there was general acceptance of our constraints and the good work we are doing.”
Yesterday, Deputy President Cyril Ramaphosa said that South Africa had given credit ratings agencies “positive news” in recent meetings.
“We have made tremendous progress on the labour instability issues,” Ramaphosa said, referring to his discussions with ratings agencies.
Fitch has not set a date for its assessment.
“I don’t think it’s high enough on the priority list - that we are seeing enough being done,” Christie Viljoen, an economist at KPMG said. “It might be enough at the moment to avoid an immediate downgrade in December, but if it is avoided in December, it’s going to happen next year.”
Leading efforts
The Finance Minister, Pravin Gordhan, has been leading efforts to avoid a downgrade to junk with meetings between the government, business and labour and by talking to foreign investors.
However, the stand-off between him and President Jacob Zuma over control of the Treasury and delays in passing new mining and anti-money laundering laws and overhauling employment legislation have fuelled perceptions of political turmoil and policy uncertainty that S&P and Fitch warned against in June when they left their ratings unchanged.
A cut by S&P would move the company’s assessment of South Africa’s creditworthiness to below investment grade for the first time in 16 years and put South Africa in line with Russia and Indonesia.
Investors already consider South Africa more risky than Russia.
* With additional reporting by Bloomberg and Reuters
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