Rand pummelled after Moody’s review

Further downwards outlook for GDP, extends an olive branch if state consolidates finances and growth ticks up Reuters

Further downwards outlook for GDP, extends an olive branch if state consolidates finances and growth ticks up Reuters

Published Apr 16, 2020


JOHANNESBURG - The rand took further blows yesterday as Moody’s revised the country’s gross domestic product (GDP) growth outlook downwards for 2020 further, despite offering South Africa an olive branch.

Moody’s said it was likely to change the country’s negative rating outlook to stable, if the government consolidated its finances and growth ticked up.

However, Moody’s emphasised that structural issues remained largely unaddressed in South Africa.

“We would likely change the rating outlook to stable if the government consolidated its finances in line with our baseline expectations; growth picked up slowly but durably; and financing risks remained limited,” Moody’s said.

“In this scenario, we would see increasing assurance that primary deficits would narrow and debt would stabilise below 90percent of GDP.”

The rand fell more than 2.5percent against the dollar to R18.67/$ by 5pm on escalating fears of a deeper recession this year, and banking stocks that took a pounding.

The FTSE/JSE All Share Index eased 3.15percent to 48301.28 points, while the Top40 Index declined 3.02percent to 44202.90points.

Last month, Moody’s downgraded South Africa’s sovereign credit rating to sub-investment grade with a negative outlook, triggering the country’s exclusion from the FTSE World Government Bond Index, and raising the cost of borrowing in the financial markets.

The rating agency said yesterday that it would likely downgrade South Africa further if growth remained very weak, primary deficits continued to widen, and financing costs rose.

“This would cause the debt burden to rise to even higher levels than currently projected, with even greater uncertainty regarding its eventual stabilisation,” Moody’s said.

“Should the government’s access to funding at manageable costs deteriorate durably, this would also exert downwards pressure on the ratings.”

Moody’s said the country’s real GDP would contract by 2.5percent in 2020, as the Covid-19 crisis weighed on economic activity.

It said the nationwide five-week lockdown would reduce the country’s productive capacities with the transport, hospitality, mining and manufacturing industries particularly affected, while weighing on households’ consumption.

The country’s growth forecast was revised down by the International Monetary Fund yesterday, which said that the economy would contract by 5.8percent this year due to Covid-19, but would rebound 4percent in 2021.

On Tuesday, the South African Reserve Bank (SARB) revised its forecast for GDP to shrink by 6.1percent this year, grow by 2.2percent in 2021, and grow by a further 2.7percent in 2022.

But BNP Paribas said yesterday that the growth contraction was likely to prove even larger than the SARB’s 6.1percent forecast, as domestic demand would grind to a halt.

BNP senior economist Jeffery Schultz said that the downwards revision was based on the assumption of a prolonged lockdown, and a protracted return to normal.

“We have recently also seen a mounting downside for the global economy from similar extensions and a potentially hesitant, staggered lifting of social distancing measures,” Schultz said.

“As such, we have revised our 2020 GDP growth forecast cut to -8.5percent from a previous -4percent, rising to +2.3percent in 2021,” he said.


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