South Africa’s credit rating has been downgraded to junk by Moody’s, which added further pressure to the rand as Asian markets opened and pushed the rand to R18.03/dollar, which is a new low.
However, early on Monday, some support came unexpectedly from China’s central bank who cut interest rates by 20 basis points, which helped the rand to recover some of its earlier losses. However, according to Bianca Botes, treasury partner at Peregrine Treasury Solutions the rand will feel more pain as global markets open.
Botes said that the main contributing factors to the rating downgrade were poor structural economic growth prospects and deteriorating fiscal metrics.
The World Government Bond Index is set to be rebalanced at the end of April, which could then see a sell off of $11 billion.
The timing of the downgrade couldn’t come at a worse time as South Africa and the rest of the world’s markets battle with the coronavirus pandemic.
The government has recognised the decision by Moody’s to downgrade South Africa one notch below investment grade for their local currency and long term foreign debt ratings.
The Covid-19 impact can be felt across numerous sectors of the economy, which includes the financial markets that experienced a significant sell off in bonds, equities and exchange rates as investors turned back to safe haven securities.
Due to the depreciated currency, the cost of imported goods will be higher, which could then see a rise in inflation. This will then limit the reaction that the South African Reserve Bank can take against Covid-19, according to Sanisha Packirisamy, economist at Momentum Investments.
However, Packirisamy said that it’s not all bad news because the bulk of the South African equity markets earnings now come from global markets, which means that any extra near term rand weakness should have a positive effect on the South African equity market.
Article Source: https://businesstech.co.za/news/finance/385821/junk-status-sends-rand-past-r18-to-the-dollar-the-weakest-point-on-record/