The rand was quoted stronger in early trading hours on Monday after the country clung to its last investment-grade credit rating.
Moody’s Investors Service on Friday announced that it had decided not to downgrade the country’s credit score to junk, although it did reduce the outlook to negative. This came even after the country released forecasts last week that showed its financial situation is rapidly deteriorating.
The US dollar was quoted as much as 1.2% lower against its South African peer at R14.79 per greenback by 09:00 on Monday. Last week, after a disappointing medium-term budget statement, the rand hit R15.16.
Moody’s held the nation’s foreign- and local-currency readings at Baa3, one step above speculative grade. The nation is already rated below investment grade at S&P Global Ratings and Fitch Ratings, both of which shifted its status to junk in 2017.
If Moody’s cuts South Africa’s rating, the country would lose its place in the FTSE World Government Bond Index. Exiting it would spark an investor sell-off and outflows of as much as R225 billion, according to Bank of New York Mellon Corp., at a time when the nation needs portfolio investment to finance its persistent current-account deficit. A downgrade would also raise borrowing costs, complicating the government’s efforts to balance the budget.
Bank of America expects the Baa3 rating to be cut after a budget statement in February.
The change in outlook from Moody’s reflects “the material risk that the government will not succeed in arresting the deterioration of its finances through a revival in economic growth and fiscal consolidation measures,” the credit assessor said in a statement Friday.
The country is already spending R138 billion to bail out Eskom Holdings, the cash-strapped power utility that is seen as the biggest risk to the economy and is saddled with 450 billion rand of debt. Rolling blackouts caused economic output to contract the most in a decade in the first quarter and prompted the Treasury to slash its growth forecast for this year to 0.5%.
“South Africa has been a car crash in slow motion,” Cristian Maggio, London-based head of emerging-market strategy at TD Securities, said ahead of the market open. “We’re still at a point where that car has not hit that wall, but you can definitely see that’s where they’re going.”
The rating affirmation affords South Africa a “narrow window to demonstrate faster and concrete implementation of reforms,” South Africa’s National Treasury said in a statement after the announcement from Moody’s. “Economic reforms have to be implemented without delay.”