JOHANNESBURG – Emerging markets are rebounding from the second-quarter horror show but for the rand October still holds sizeable risks.
Two events, in particular, loom large: Finance Minister Nhlanhla Nene’s Medium-term Budget Policy Statement, and a review of the country’s credit ratings by Moody’s.
The rand rebounded 3.9 percent in September after a 9.6 percent slump in August, the worst for that month on record. It could extend gains as the dollar takes a breather, according to Neels Heyneke and Mehul Daya, strategists at Johannesburg-based Nedbank Group.
Much hinges, however, on Nene, who has to reassure both Moody’s and investors that he has a handle on spending and debt. Last year, a widening fiscal deficit and slower economic growth projections led S&P Global Ratings and Fitch Ratings to strip the country of its investment rating, sending yields rocketing and the rand weaker.
That would not be easy, given that the economy is struggling to emerge from a first-half recession.
“October is key,” said Christopher Shiells, a London-based emerging-markets analyst at Informa Global Markets. “We and Moody’s want to see a medium-term Budget policy statement that focuses on fiscal consolidation, and stabilising debt levels, given the low growth environment.”
A positive statement from Nene could push the rand to about R13.75 against the dollar, from about R14.22 on Friday, he said.
Moody’s rates South Africa’s local-currency debt at Baa3, the lowest investment level. The rating company’s stable outlook on the debt means there is little chance of a change in the assessment soon, though it said last month South Africa has to stabilise its debt to prevent a change to negative.
Disappointing Moody’s would prove costly. Foreign investors own almost 40 percent of South Africa’s R1.97 trillion in local-currency bonds. Should the country lose its investment rating, it would be excluded from Citigroup World Government Bond Index, sparking outflows of about $5 billion (R70.53bn) as investors who track the gauge are forced to sell.