While South Africa’s rand has weathered the emerging market currency storms better than its counterparts in 2018, the rand has weakened ahead of credit ratings from two of the Big Three rating agencies.
South Africa’s rand weakened earlier on Friday, 25th May 2018. It was 0.42 percent weaker at 12.46 to the dollar. Down from Thursday’s one-week best of 12.38 touched briefly as the South African Reserve Bank kept interest rates unchanged, citing high consumer price inflation risks. The central bank said consumer price inflation is expected to average 4.9 percent this year, rising to 5.2 percent in 2020.
“The foreign exchange market was unimpressed by the (central bank) meeting. This is unlikely to change today in the regular review of the country rating by rating agency Standard & Poor’s,” Commerzbank analyst Elisabeth Andreae told Reuters.
The currency had experienced especially strong performance as against dramatic falls seen in other emerging markets this month, but analysts already forewarned on the potential risks facing the currency.
Fitch and S&P are expected to publish their reviews of the country’s credit rating later today. S & P had cut the local currency debt to “junk” status in November because it thought there had been “further deterioration of South Africa’s economic outlook and its public finances.” In March, the rating agency said it would be nowhere near to upgrading the rating until reforms under new President Cyril Ramaphosa took shape. It downgraded South Africa’s long-term local currency rating to ‘BB+’, or junk, from ‘BBB-‘ with a stable outlook in 2017.
On the other hand, Fitch Ratings kept both South Africa’s local and foreign currency credit ratings unchanged at BB+, one notch below investment grade, with a stable outlook last year.
Being downgraded can have a big impact on a country’s ability to borrow money on the markets. Investors see it as a riskier bet and demand higher returns to lend to governments.
Investors are also expecting the results of the growth rate of domestic production for the 1st quarter of 2018. Also, the growing recognition of an impasse between government and public sector trade unions over the negotiation of a new three-year wage agreement could also influence the strength of the Rand. The Public Servants Association (PSA), a union that represents more than 230,000 public sector workers, wants an above-inflation increase of 12 percent across the board.
