Market relief after Moody's says it might grant a stay of execution
Moody’s said that there was nothing to flag at the moment on South Africa's economic performance, thwarting fears that it may downgrade the country's sovereign debt to junk.
It said it would await Finance Minister Tito Mboweni’s Budget speech next month to see if there would be any reforms.
The downgrade threat had rattled the markets since the ratings agency reviewed the country's outlook from stable to negative last year.
The possible reprieve bolstered the markets slightly as the rand held steady at 0.14percent to R14.60 against the dollar by 5pm, following days of pressure amid emerging market volatility and global risk-off sentiment over deadly Chinese coronavirus.
China’s deadly coronavirus hit global stocks on Monday, with the FTSE/JSE All Share Index falling by 2.37percent to a six-weeks low as risk-averse investors fled to safer options such as bonds and gold.
But Lukman Otunuga, a senior research analyst at FXTM, said the rand was likely to remain unfazed by Moody’s comments as concerns about the coronavirus fears and the impact it may have on global growth mounted.
“We expect the rand to become highly sensitive to external and domestic risk ahead of the 2020 Budget in February,” Otunuga said. “The local currency is shaky against the dollar and could slip back towards 14.70 in the near term if the rand continues to depreciate.”
South Africa’s economy is holding on to the last investment grading above sub-investment status by Moody’s.
Both S&P Global and Fitch Ratings downgraded the country’s sovereign credit rating to junk in 2017.
In November, Moody’s reviewed South Africa’s outlook from stable to negative, mainly due to unsustainable government debt, but maintained the country's credit rating status at investment grade.
Nolan Wapenaar, head of fixed income at Anchor Capital said the downgrade was not a foregone conclusion.
Wapenaar said the market worked on a 65percent to 70percent probability.
“With yesterday’s news from Moody’s, we’ve seen that the market has declined the probability of a downgrade to drop to about 50 percent,” Wapenaar said.
“The markets have definitely shifted expectations of a downgrade, or maybe it has expectations of survival. Our reaction to it is that at the moment it looks like a stay of execution, or a postponement, rather than it’s not going to happen.
“South Africa has structural problems, and unless we address the structural problems the downgrade is inevitable. It might just be delayed until November 20, which is the next Moody’s review.”
Moody’s said it would look at South Africa’s potential to improve its tax compliance as the tax revenue side has been deteriorating.
In October, Mboweni said tax revenue was expected to decline 4percent to R1.37trillion for 2019/20. He proposed additional revenue measures of R15billion for the financial year.