In the early hours of trading on Monday, the rand was quoted stronger as the country clung to its last investment grade credit rating.
On Friday, it was announced that the Moody’s Investors Service would not downgrade the country’s credit score to junk, however, it did reduce the outlook to negative. This came after the release last week that the forecast for the country is rapidly deteriorating.
Moody held the readings for the nations foreign and local currency at Baa3, which is one step above speculative grade. S&P Global Ratings and Fitch Ratings already hold the nation below investment grade as they shifted the status to junk in 2017.
According to the Bank of New York Mellon Corp, if Moody’s cuts the rating of South Africa then the country would lose its place in the FTSE World Government Bond Index. This could then mean that an investor sell off would spark up and outflows of almost R225 billion. This would come at a time where the country needs portfolio investment to finance its persistent current account deficit. On top of this, a downgrade would mean a rise in borrowing costs, which will then complicate the governments efforts to balance the budget.
Bank of America believes that the Baa3 rating will be cut after a budget statement in February.
Moody’s outlook reflects the material risk that government will not be able to stop the decline of its finances through an economic growth revival and fiscal consolidation measures according to the credit assessor.
At the moment R138 billion is being spent by the country to bail out Eskom Holdings, which is seen as the biggest risk to the economy.
South Africa has been afforded a small window with the rating affirmation to show faster and concrete implementation of reforms. The reforms will need to implemented without delay said South Africa’s National Treasury.
Article Source: https://www.fin24.com/Markets/rand-perks-up-after-moodys-reprieve-20191104