JOHANNESBURG – The rand traded firmer against the dollar in a critical week for South Africa as the Medium-term Budget Policy Statement (MTBPS) and a credit rating review by Moody’s Investors Service will determine the road ahead for the economy.
“The main risk event will be the MTBPS. Should the statement paint a gloomy picture of the South African economy, the rand will be in the direct firing line,” said senior research analyst at FXTM C.
The Minister of Finance, Tito Mboweni, is set to use his MTBPS to assure the market and ratings agencies that the government is firmly in control of its funds.
Herschel Jawitz, the chief executive of Jawitz Properties, said yesterday that the MTBPS would be a key indicator of not only the country’s current financial position, which was expected to be dire, but also the government’s resolve to deal with the critical issues that need to be fixed.
“The current state of both business investment and consumer spending is a crisis of confidence in the government and not of opportunity or affordability,” he said.
Yesterday, the rand outperformed its emerging-market peers, with the currency trading 5 cents stronger to the dollar at R14.54 by 5pm.
The rand has been posting sustained gains over the course of October, appreciating against almost every single G10 currency since the start of the month.
The local currency traded favourably due to the positive market outlook following trade talks between the US and China after it breached the R15 to the dollar mark last month.
The rand is also running stronger ahead of the expected 25 basis point rate cut by the US Federal Reserve’s Open Market Committee tomorrow.
Investec chief economist Annabel Bishop said the rand’s recent run of strength was chiefly supported by progress in trade negotiations between the US and China, with a partial trade deal having been achieved.
Bishop said although the rand had settled to about R14.60 to the dollar, there was still a material risk premium on investor concerns over Eskom and the projections of further deterioration in public finances expected in the MTBPS.
Bishop said the rand would see substantial depreciation if a rating downgrade from Moody’s did, in fact, occur.
“We maintain our view of no credit rating downgrade from Moody’s this year, but with a heightened risk of one occurring, although a drop to a negative outlook remains more likely. Should Moody’s not downgrade South Africa the rand is likely to see a relief rally,” Bishop said.
“However, a credit rating downgrade would likely cause the domestic currency to weaken towards R15.50 to the dollar. Should the global environment not prove to be benign the domestic currency could weaken towards R16 to the dollar, or worse, in a global recession.”
Bishop said South Africa’s economic outlook remained heavily exposed to the global outlook, and China’s economic performance in particular, as China was a key importer of South African commodities.
Bishop said to date this year, South Africa had seen a net bond sell-off from foreigners, who had reduced their holdings by -R5.5 billion, although -R24.8bn was in the second half of this year to date. Indeed, subsequent to the progress in the trade negotiations between the US and China foreigners have been net buyers of R8bn of South African bonds.
The MTBPS comes amid a busy week for the economy, as the latest quarterly unemployment figures, producer price index data, the Absa Purchasing Managers’ Index and the balance of trade report will also be released.