Rand Bounce Back Seen at Risk on South Africa Political Outlook

JOHANNESBURG (Capital Markets in Africa) – South Africa’s politics and economic outlook could trip up the gains the rand has managed to make in bouncing back from an expected credit-rating downgrade, analysts say.

The rand rallied as much as 3.2 percent on Monday, overturning its losses on Friday when S&P Global Ratings demoted local currency-denominated debt to junk, amid relief that Moody’s Investors Service retained its investment-grade rating. Moody’s has warned it may do the same following the nation’s February budget, with investors set to watch the ruling party’s response and leadership conference for direction before then.

Below is a compilation of analysts’ notes and comments after the S&P downgrade:

Arqaam Capital Ltd.
South African recovery in line with similar market reactions in Turkey and Brazil following downgrades there, write Jaap Meijer and Michael Malkoun. A downgrade usually leads to short-lived currency and bond yield weakness followed by relatively strong recovery

Market already prices in junk status from Moody’s as well. CDS spreads sit at 192bps, factoring in a rating 2 notches lower, in-line with Turkey or Brazil. The African National Congress elective conference is pivotal as it may lift business confidence

BNP Paribas SA
“Investors may have pre-hedged their portfolios against a potential downgrade,” BNP Paribas analysts including Wike Groenenberg said in a note to clients. “In an environment where inflows to emerging markets remain positive and South Africa’s current funding needs remain contained, we think downgrades are unlikely to trigger uncontrolled deleveraging. Our analysts of both macro and micro factors suggests that the negative momentum in the ZAR is slowing”. Inflation to remain in target band of 3% to 6% next year

Investec Securities
Market impact has been less than historic norm as “South Africa has a sophisticated financial market,” economist Annabel Bishop writes in a note. Should the country lose its Moody’s investment grade sovereign rating it could see debt portfolio outflows estimated between 40 billion and 200 billion rand. The lower South Africa’s credit ratings fall, the more financial market volatility it will likely experience. Global financial markets are currently in a risk-taking phase so effect of the credit rating downgrades can be counteracted, especially for mild downgrades

Nedbank Ltd.
“The bond market had largely anticipated the ratings actions,” analysts including Dennis Dykes and Nicky Weimar write in a note. The reprieve by Moody’s gives the South African government one last chance to change its policy direction. Investors will watch developments over the next few weeks very closely, most notably the ANC conference.

UniCredit SpA
The worst was averted but an ominous “for now” hangs over the country, say analysts including Erik Nielsen and Ingo Heimig in a note. Politics and economic outlook likely to weigh on investor minds. “Weak-dollar” factor may prevent USD/ZAR from spiking very abruptly. Maintain forecast of 14.40 by end-2017

Source: Bloomberg Business News