Moody’s Market Boost Undone by Rand Slump: South Africa CreditRobert Brand and Mike Cohen
A market rally sparked by Moody’s Investors Service this week proved short-lived as the rand’s worst start to the year since 2009 propelled South African credit risk to the highest level in more than a month.
The cost of insuring South Africa’s dollar debt against non-payment for five years using credit default swaps climbed nine basis points the past three days to 211, after dropping the first two days of the week, according to data compiled by Bloomberg. A composite gauge for emerging-market default swap prices was little changed in the period.
While Moody’s assessment on Jan. 6 that South Africa’s debt is “manageable” sent the rand and bonds higher, the gains have vanished amid concern the Federal Reserve is on course to end its stimulus program this year as the U.S. economy strengthens. The sell-off will increase scrutiny of South Africa’s fiscal and current-account deficits and may lead to a fresh review by the rating companies later this year, according to Barclays Plc’s African unit.
“We have bought ourselves some time, and probably our ratings will remain for the time being,” Michael Keenan, a currency strategist at Barclays Africa Group Ltd., said by phone from Johannesburg yesterday. “As excess liquidity dries up and inflows into our market slow, that exposes fundamental flaws that the rating agencies will scrutinize continually.”
The rand has declined 2.3 percent this year, the worst performer among 16 major currencies tracked by Bloomberg after the Canadian dollar. The rand fell as much as 0.6 percent to 10.8353 per dollar yesterday, the lowest level since October 2008. It gained 0.6 percent to 10.7367 by 3:58 p.m. in Johannesburg. Yields on benchmark bonds due December 2026 decreased 11 basis points, or 0.11 percentage point, to 8.18 percent.
South Africa will probably remain in the Baa investment-grade range “for the foreseeable future,” Kristin Lindow, a New York-based senior vice president at Moody’s, said in a credit opinion on Jan. 6, which she emphasized didn’t constitute a rating action or affirmation. Moody’s ranks South Africa Baa1, the third-lowest investment level, with a negative outlook.
That outlook partly reflects increasing government debt over the next two to three years, Moody’s said. Gross government debt will rise to 44.8 percent of economic output in the year through March and will climb to 47.7 percent in 2017 before stabilizing, the South African Treasury said Oct. 24.
“The government’s ratings reflect a relatively manageable debt position,” Lindow said. “The ratings could be downgraded should the government’s direct debt rise much above 45 percent of GDP.’
A weaker rand doesn’t pose a ‘‘significant credit risk” because the government has a relatively small exposure to foreign-currency denominated debt, Lindow said in an e-mailed response to questions yesterday.
“Many of the country’s exports are dollar-denominated, so the depreciation results in increased local currency-denominated income,” she said. “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.”
The Moody’s statement came after Fitch Ratings and Standard & Poor’s affirmed the nation’s creditworthiness in December, soothing concern that the nation was set to be downgraded. S&P rates South Africa BBB with a negative outlook, while Fitch has the same classification with a stable outlook. Both are one step below Moody’s.
“Certainly the risk of a downgrade right now is diminishing,” Mohammed Nalla, head of strategic research at Nedbank Group Ltd., said by phone from Johannesburg on Jan. 7. Rating companies “will probably wait for the budget, and then watch for signs of fiscal slippage towards the middle of the year before making a move,” he said.
Jabulani Sikhakhane, a spokesman for South Africa’s National Treasury, didn’t answer his mobile phone or respond to a message seeking comment.
The Fed said after last month’s meeting that it will taper bond buying to $75 billion a month starting in January from $85 billion. It will probably reduce purchases in $10 billion increments over the next seven meetings before ending them in December, according to the median forecast in a Bloomberg survey.
Foreign investors sold a net 3.44 billion rand ($318 million) of South African bonds this year, adding to 2.13 billion rand of outflows in December, according to JSE Ltd. data. The nation needs foreign investment of about 19.5 billion rand a month to finance its current-account shortfall, which swelled to 6.8 percent of GDP in the third quarter, according to Standard Bank Group Ltd.
The rand’s decline may improve the competitiveness of South Africa’s exports, boosting the economy and cutting the current-account deficit, said Johann Els, an economist at Old Mutual Investment Group, South Africa’s biggest private investor. That may help the currency rebound, he said.
“The tapering is going to be very slow, the current account is going to improve,” Els said by phone from Cape Town yesterday. “We’ve already seen the first signs in the export and import numbers. I actually think the rand is set for a more stable period this year.”
The rand-dollar relative strength index, which measures the velocity of a currency or security’s price movement to identify overbought and oversold conditions, rose above 70 yesterday, indicating it may be poised to rebound. The currency may recover to 10.50 per dollar by the end of the year, according to the median forecast of 24 analysts in a Bloomberg survey.
While it may be technically oversold, the currency remains at the mercy of the Fed, said Theuns de Wet, head of global markets research at Rand Merchant Bank in Johannesburg.
“As long as U.S. data surprises on the upside, that would suggest that the Fed was right to start tapering and bring into play the likelihood that they may even increase the extent of tapering,” De Wet said by phone from yesterday. “In that case, the rand will continue to weaken.”