Fed move could bring emerging markets tailspin – analyst

Peregrine Treasury Solutions partner Bianca Botes wrote in a circular on Friday evening that the Fitch sovereign rating for the South African economy was in line with currency data for the week, which was roundly positive for larger economies.

Fitch announced maintained South Africa's BB+ score, but revised its outlook for the country from stable to negative, citing poor GDP growth and continued financial assistance for beleaguered state-owned entities, especially Eskom.

Botes said the rand responded to United States GDP gaining 2.1% quarter-on-quarter annualised for the second quarter of 2019.

Botes wrote that a negative spike was further compounded by Fitch's announcement shortly after close of trade on Friday that it had revised the outlook on South Africa's sovereign debt downwards from stable to negative.

"Although the rating agency has maintained its score of BB+ for SA, an outlook downgrade generally precedes a rating downgrade. By Friday evening the rand's selloff saw the currency touching R14.30/$, trading over 3% weaker than the opening rates on Thursday," Botes wrote.

Botes said The resilience of the US economy was  evidenced in the ongoing strong GDP numbers as well as employment figures.

"With the dollar trading at two-week highs, the rand is feeling the pinch. Any move by the Fed, walking back their initial dovish outlook, will see the emerging markets go in to a tailspin targeting R14.50 as the next level," Botes said.

National Treasury, in response to the ratings announcement, said it remained committed to getting Eskom and other South African state-owned entities in shape and productive.

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