Cape Town – The rand weakened on Wednesday following news that rating agency Standard & Poor's (S&P) has lowered its 2016 growth expectations for South Africa to 0.8%, down from 1.6% in November.
S&P's views are considered important as it has placed South Africa one cut above junk at BBB- with a negative outlook, meaning a downgrade is more likely. The rand, which started Wednesday at R15 to the dollar, was trading at R15.24/$ at 11:00 following the announcement.
Umkhulu Consulting's Adam Phillips said investors sold quickly following the news, resulting in the rand being marked down quickly. "Remember that rating agencies can make decisions when they want and operators will protect themselves for a surprise announcement," he added in his morning note.
"The rand intra-day sessions will continue to attract movements of 30 cents, so be patient if one is an exporter or importer."
S&P said economic growth in South Africa has been on a downward trend since 2011.
“Last year, economic growth slowed to 1.3%, below the estimated rate of population growth, implying a contraction of output per capita by 0.4%,” it said in a statement.
“A range of adverse global and domestic factors continue to weaken South Africa's macroeconomic outlook,” it said.
South Africa's export commodities slumped again between October 2015 and January 2016, with iron ore down by more than 20% and platinum by 12%, S&P senior economist Tatiana Lysenko explained in the report, Weak External Conditions Plus Domestic Issues Dim South Africa's Growth Prospects.
“Despite the recent recovery from January lows, we expect most commodity prices to remain depressed, largely due to weaker demand from China, which is South Africa's biggest export destination,” S&P said.
The prolonged drought is hitting agricultural output, while also lifting food prices, it explained.
"Although these factors are either external (low commodity prices) or temporary (the severe drought), growth is also constrained by ongoing structural issues, such as poor labour market outcomes and infrastructure bottlenecks," Lysenko said.
“Feeble economic prospects have weakened the sentiment of domestic and foreign investors,” S&P said. “Already weak confidence took a further blow when a respected finance minister, Nhlanhla Nene, was removed from his position in December.
“As a result, foreign portfolio flows into South Africa slowed markedly in the third quarter, and turned negative in the fourth quarter. The related currency depreciation, accelerating inflation, and higher interest rates in turn are weakening short-term growth prospects.
"Taken together, these developments have prompted us to lower our growth expectations for this year to 0.8%, down from 1.6% in November; and to 1.8% in 2017, down from 2.1%," Lysenko said.
S&P's forecast is in line with that of the South African Reserve Bank, which in March announced a 0.8% growth forecast for 2016, down from 1.5%.