FOREX Africa: A Rating Downgrade Could Be Good For The South African Rand
The South African rand could strengthen if credit rating agencies downgrade the country’s debt to junk status at the end of this year, according to economist Dawie Roodt.
The country’s struggling economy is facing possible credit downgrades by the global rating agencies Moody’s, Standard & Poor’s and Fitch by the end of the year after escaping the cut in June.
Stuttering economic growth, rising fiscal debt levels and political squabbles ahead of municipal elections are however likely to push the rating over the edge in the next review, Roodt said.
“Based on these three variables, I think chances are very good that we’re going to see a downgrade,” he told Fin24. “Ironically, I think a downgrade will probably lead to an appreciating currency.”
The South African rand, which depreciated 26 percent last year, strengthened extended its 8 percent rally this year after S&P’s held the country’s credit rating at an investment grade above junk.
It is however widely expected to come under pressure if rating agencies eventually lower their ratings in the next round of reviews in December.
The imminent downgrade will make investors perceive debt instruments in the Africa’s second largest economy as riskier and hurt foreign direct inflows into the economy, Mail & Guardian Africa reported.
This could lead to an undervalued currency that present attractive buying opportunities after the run-in.
“So, if you get a downgrade, then institutional investors will probably take the money out of South Africa which will lead to a compression in the currency. But immediately the speculators are going to say listen, we’ve got a cheap currency, we’ve got very attractive yields in South Africa – let’s give it a go,” Roodt said.
“So, what we’re probably going to see is a stronger currency after the downgrade – not immediately – but soon afterwards. A stronger currency, but a much more volatile currency.”
South Africa has been facing challenges mainly due to falling commodity prices on the global market that has hurt the country’s metal export revenue and a slowdown in the Chinese economy, its top trade partner.
Other challenges facing the most industrialized economy on the continent include a deteriorating political situation back at home, a weakening local currency, power outages and a ravaging drought that has seen food prices jump in recent months.