Junk Status Beckons As SA Economy Faces A Massive Drop In The International Market

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The SA economy, alongside the ailing rand’s risky stand in the international market and increased political crisis sparked by the latest firing of the former finance minister and his deputy Jonas leaves the currency at its worst drop per week since 2015.

The rand on Monday morning declined in trade as political uncertainty underpins predictions for the week ahead – including a credit rating review on Friday.

By 12h07 on Monday the rand lost 1.3% of its value against the greenback, trading at R13.59, having closed last week at R13.42 while the GDP growth for the year dropped from a projected 1.1% to 0.2%. This drop against the dollar‚ raised inflation concerns.

The rand had its steepest weekly drop since 2015‚ falling 8% thereby affecting the SA economy.

So far, the Dollar/Rand was down 1.30% to R13.59;Pound/Rand was down 1.16% to R17.00; Euro/Rand went down 1.36% to R14.50

The shocking Cabinet reshuffle jolted the markets and drew criticism from various quarters‚ including the business community as the country looks at having its sovereign credit rating cut to junk by two of the big three ratings agencies in the coming days.

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S&P and other rating agencies had last year warned that the country could be downgraded if political leaders and the Zuma-led administration fail to stabilize the SA economy and restore political stability.

Now the rating agency S&P which was only scheduled to review SA’ s credit rating on June 2, reportedly had an emergency meeting over the weekend.



According to Barclays report, a cut to junk for SA would result in forced selling by institutions whose mandates do not permit them to hold “sub-investment grade” bonds of at least $500m in dollar-denominated debt.

“We think it is very likely that all the agencies will downgrade the sovereign credit rating by one notch each,” RMB currency strategist John Cairns warned on Friday.

“This means that the foreign currency credit rating from S&P and Fitch will fall to BB+, while it will sit at the edge of investment grade at Moody’s, Baa3. We think all three rating agencies will retain their negative,” he said.

Moody’s action is expected to occur as per schedule on April 7. Fitch is not bound by a timeline, so it can also act quickly. It is not certain, but S&P might bring forward its review to the coming weeks, ahead of the scheduled June 2 deadline.

Meanwhile, Rand Merchant Bank (RMB) analyst Michelle Wohlberg said in a note that trading today ought to continue being headline-driven as the market grapples with the consequences that the Cabinet reshuffle will have on SA in the near to medium term

“With our new finance minister Gigaba promising to push economic growth while sticking to spending frameworks already in place‚ we might still to see local assets continue to trade in a positive light tomorrow.”

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The rand has been in sharp decline since Zuma announced a cabinet reshuffle, which included the sacking of the treasury heads. The uncertainty around the future of the Treasury was not quelled after a press briefing by the new minister of finance, Malusi Gigaba, who signaled that he would implement “big changes” in the department.

Among Gigaba’s top priorities in the treasury is to oversee the redistribution of wealth to the country’s black majority, stating outright that he will direct R500 billion to black-owned businesses, and the masses.