South Africa: The rand remains susceptible to risk-off sentiments - BBH

S&P downgraded South African local currency debt to sub-investment grade in November, citing a further deterioration in the economic outlook and fiscal performance, points out Masashi Murata, Research Analyst at BBH.

Key Quotes

“South Africa’s credit rating by Fitch has been in sub-investment grade territory since April. It is likely only a matter of time before Moody’s follows suit. Moody’s has kept South African debt on negative watch, implying that it may downgrade the debt to junk if the next annual budget does not meet its expectations.”

“The South African economy has been weak. Its Q3 GDP slowed to 0.8% y/y from 1.3% y/y in Q2. The South Africa Reserve Bank (SARB) cut the growth outlook to 1.2% in 2018 and 1.5% the following year. Weak growth would enhance the downside risk of government revenue, and make it more difficult to cut expenditures.”

“South African inflation has eased in 2017. Headline CPI remains close to the middle of the target range, and core CPI in October slowed to 4.5% y/y, which is the lowest level since July 2012. However, SARB will need to remain vigilant to stem inflation pressures. SARB foresees its core CPI will accelerate to 5.1% y/y in 2018 and 5.3% in 2019. In November, SARB voted unanimously to keep rates at 6.75%, contrary to a split over a possible rate cut in September. It said the inflation outlook faces upside risks including weak rand and high oil prices.”

“While the rand remains vulnerable to possible risk-off sentiments, including US monetary policy normalization by the Fed and concerns over rating downgrades, it has been supported by high yields.”