The good and bad news on the Rand’s recent strong performance

The performance of the Rand holds both good and bad news for South Africa, because while it makes way for cheaper imports, it also makes it more difficult for exports.

“The Rand is doing well because Moody’s has left its outlook unchanged. There is also the surplus on the balance of payments with a smaller demand for foreign exchange,” Professor Jannie Rossouw of the Wits Business School says.

Investec chief economist Annabel Bishop says in her latest Rand Note that Moody’s gave South Africa the benefit of the doubt and left its rating and outlook unchanged at Ba2 negative, as well as adopting a wait and see approach to the country’s fiscal consolidation and wage agreements in particular.

“The rand also continues to benefit from the US dollar’s weakness. Moody’s did not update a number of ratings on the scheduled date, 7 May, including South Africa, Denmark and Italy. The rand was 31.7% stronger year-on-year on Monday,” Buishop said.

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Improved political environment

She points out that the perceived improved political environment is also helping the domestic currency as the clean-up in government and the ruling party continues.

“Moody’s is giving the country a window to repair its government finances after the blowout years of corruption of the 2010s decade which decimated the fiscus, before the spending pressures and revenue collapse from the Covid-19 lockdown last year worsened the situation.”

However, she warns, that any indication the government will cave in to severe pressures for higher wages from civil servants, parastatal employees and any other remuneration pressure on the fiscus, would reduce our ability to avoid further credit rating downgrades.

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“The rating agencies can adjust our rating between meetings just as easily as they choose not to provide any rating review when it is scheduled. They can also move by more than one rating level and South Africa is not yet deemed able to move off Moody’s negative outlook.”

Bishop says with Moody’s pausing to provide a grace period for US, Fitch, which also has us on a negative outlook at BB, could do the same and she indeed expects it will.

However, for the country to increase its weighting of its UP-case probability, it will need to show a much quicker trajectory for both its regulatory reform and vaccine rollouts, which are inadequate at the moment and proceeding far too slow.

Need for faster economic growth

“For a meaningful upwards revision to the up and extreme up scenario probabilities, South Africa will need to show faster economic growth ensuing from its reforms, as well continue its corruption eradication programme and make much greater strides in fiscal consolidation.”

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Bishop believes the rand’s strength could persist during this quarter, if not this year, although it is still beholden to many risks on both the up and down sides.

“While Moody’s outcome gave it a fillip and Fitch and S&P are also not expected to downgrade this month, the rand is still subject to volatility.”

She says that while global financial markets are in a risk phase currently, market sentiment is focused on economic recovery and therefore stronger demand for commodities, the strong positive market outlook will not last indefinitely, or even consistently.

“While the rand may average closer to R14.50/USD than R15.00/USD in the second quarter of 2021, the domestic currency is always at high risk of weakness, as its economic and fiscal fundamentals still have not improved dramatically and risk aversion results in selling of risk assets.”