Rand Up 7 Percent In Last 3 Months. Moody’s Says Downgrade Less Likely. Will It Last?
The market has overlooked South Africa’s economic stagnation, leadership crisis and the chance its credit rating could be downgraded to junk, with the rand emerging as one of this year’s best trades, Financial Times reported.
Investors have been lured back in as commodities prices rebound and the likelihood that U.S. interest rates will stay lower for longer.
The rand has risen over 7 percent in the past three months alone and is the third top emerging market gainer so far this year after the Brazilian real and the Russian rouble, according to Financial Times.
The rand broke through 14 to the dollar Tuesday as it made its fourth straight day of gains against the dollar, Business Tech reported.
As the rand continues to strengthen, ratings agency Moody’s said a credit downgrade for South Africa is less than 50 percent.
South Africa just needs to continue with its economic policies with Finance Minister Pravin Gordhan staying in his position, Moody’s said, according to Eyewitness News.
Moody’s said on Tuesday that a credit ratings cut is likely if economic growth falls below South Africa’s estimated growth of 0.2 percent this year, Reuters reported, according to Times Live.
Following a 1.2 percent contraction in the first quarter, South Africa’s economy rebounded to 3.3 percent growth in the second quarter, showing it’s more resilient than expected.
Expectations South Africa’s central bank and the Fed would hold off on raising rates this week have provided further support for the rand.
Meanwhile the world biggest producer of platinum and manganese is benefiting from higher global commodity prices.
Too soon to celebrate
South Africa’s political uncertainty might be calming down, but it would be wrong to ignore it, RMB analyst John Cairns told Business Tech.
“(Finance Minister Pravin) Gordhan has remained in the saddle … I think we have to assume he is going to be around to table the finance ministry’s medium-term budget in late October.
“However, it remains to be seen if he is around when the rating agencies make their decisions. I think that could be a good reason for the strength in the rand because exporters have been holding on, wondering what has changed.
“They would be right in their thinking and all it took was for a few to sell and others were forced to. That is why I believe the recent moves are a short-term phenomenon.”
Peter Attard Montalto, an analyst at Nomura, told Financial Times that the rand’s rally could be short lived due to global and domestic headwinds. He said he expects the rand to fall back down to 17 per dollar before the end of 2016.
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