South African Rand Slump Will Not Hurt Credit Rating – Moody’s
Moody’s Investment Services has said a slump in the South African rand to a five year low against the dollar in the first week of this year will not affect its credit rating in the nation, Bloomberg reported.
The rand has already depreciated 2.8 percent in the first week of 2014, extending a 19 percent drop last year, mainly due to widespread expectations that the Federal Reserve Bank will end its debt purchases this year.
The currency plummeted to touch a new five year low of 10.8353 per dollar on Thursday.
“The South African exchange rate doesn’t pose a significant credit risk for the sovereign because the government intentionally has a relatively small exposure to foreign-currency denominated debt,” Kristin Lindow, a senior vice president at the ratings company told Bloomberg.
“Likewise, the Reserve Bank’s determination not to intervene to try to affect the level of the rand exchange rate means that the volatility is not a risk for the foreign reserves, which is credit positive,” she added.
Moody’s lowered South Africa’s rating in September 2012 to Baa1, the third-lowest investment-grade level, with a negative outlook, as economic growth slowed and the government’s budget deficit widened.
Standard & Poor’s and Fitch Ratings have a BBB assessment on the nation’s debt, one level below Moody’s.
“The continued rise in government debt levels is a factor behind the negative outlook,” Lindow told Bloomberg “However, the depreciation of the rand will not meaningfully affect the Treasury’s ability to rein in the deficit.”
Bloomberg said the rand’s slump may boost the competitiveness of the nation’s exports. Annual growth in manufacturing output slowed to 0.3 percent in November from 1.7 percent the month before.
“Many of the country’s exports are dollar-denominated, so the depreciation results in increased local currency-denominated income,’ Lindow said. ‘‘Historically, for example, we have seen corporate profits improve after a steep fall in the currency.”