South Africa heaved a collective sigh of relief on Friday as international ratings agency Moody’s decided to postpone its review of the country’s sovereign ratings. Moody’s is the only agency rating South African sovereign debt at investment grade. The current rating is Baa3 with a stable outlook.
Tito Mboweni’s strategy
However, this is not an all clear signal as Moody’s can revise its rating at any stage. The agency will pay close attention to the medium term budget policy statement (MTBPS), which will be announced on October 24th by incoming Minister of Finance Tito Mboweni. Most analysts are taking the view that Moody’s is unlikely to react after the MTBPS, unless the budget contains major changes that are likely to impact projections over the next three years. Moody’s is likely to give the incumbent Minister time to settle in and make his mark on National Treasury. Tito Mboweni is regarded as a safe pair of hands and is well respected by the market.
Mboweni is likely to stick to his predecessor’s (Nhlanhla Nene) strategy and will use the February 2019 budget instead, to exert his influence. He is expected to stick to the path of fiscal consolidation. With Moody’s watching closely he doesn’t have much room to manoeuvre. South Africa now finds itself in the difficult position of inflation rising due to a weaker currency and high oil prices, flat economic growth, government debt at dangerously high levels, consumers under enormous financial pressure and almost no room to stimulate growth through either increased spending or tax breaks.
President Ramaphosa’s efforts to stimulate the economy through the announcement of a R43 billion stimulus package has failed to excite markets that have heard it all before, and was already part of the government’s existing medium-term strategy. The announcement is viewed as a step in the right direction but fails to address the deeper reasons for the country’s poor economic performance, as well as declining competitiveness against its emerging market peers.
Other emerging markets have enjoyed strong economic growth, allowing them to make the necessary policy responses and stabilise their economies. Whereas South Africa has little ammunition, either to defend the currency through rate hikes or stimulate the economy through infrastructure investment.
Markets and businesses prefer certainty and the highly emotive land reform issue undermines business confidence, which continues to prevent any significant deployment of the substantial cash pool that corporate South Africa has accumulated on its balance sheets.
The bigger picture
The local currency currently benefits from an improving outlook for emerging markets, which after two quarters of decline is expected to stabilise over the coming months.
Strong policy responses from both Argentina and Turkey have restored some confidence in the sector, but trade war actions by Donald Trump and possible further USD strength remain a key threat to the Rand. The US Federal Open Market Committee meeting minutes due this Wednesday, could provide further pressure for the Rand if the rhetoric is more hawkish. The Fed hiking cycle continues to undermine emerging market currencies and has particularly impacted the Rand. Last week’s lower-than-expected CPI figures out of the US helped support a recovery in the local currency, but we can expect a fairly tight trading range for the Rand this week, between 14.35 and 14.55 against the USD.