Will South Africa avoid anothe

PRETORIA, SOUTH AFRICA – MARCH 05: Finance Minister Nhlanhla Nene addresses the audience during the Federation of Unions of South Africa (Fedusa) conference on March 05, 2018 in Pretoria, South Africa. Nene vowed to clean up state owned enterprises and government in order to put the country’s economy on a recovery path. (Photo by Gallo Images / Netwerk24 / Deaan Vivier)

Will South Africa avoid another downgrade by Moody’s?

The main South African Rand-related event in focus this week is Friday’s rating review by Moody’s Investor Service agency.

Will South Africa avoid anothe

PRETORIA, SOUTH AFRICA – MARCH 05: Finance Minister Nhlanhla Nene addresses the audience during the Federation of Unions of South Africa (Fedusa) conference on March 05, 2018 in Pretoria, South Africa. Nene vowed to clean up state owned enterprises and government in order to put the country’s economy on a recovery path. (Photo by Gallo Images / Netwerk24 / Deaan Vivier)

It is believed that South Africa will avoid slipping to junk status due to positive political developments over the recent months – most notable being the ousting of former president Jacob Zuma. However, a failure to maintain its current, and only, investment grade rating with a major agency could risk capital outflows from the country to the tune of approximately R100 billion.

While Friday will be a key event impacting the Rand, additional attention will be given to Wednesday’s FOMC statement and press conference. The key variable in this event will be if FOMC members increase their expectations and vote for four interest rate hikes in 2018 – up from three. With markets not yet fully pricing in even three rate hikes for 2018, an increase to four holds the potential for sharp US Dollar strength.

Broad market sentiment this week has been muted as participants wait to see results from the FOMC. If anything, most are still quite risk-averse due to recent declines in equity markets and fears of international trade wars. Considering this, investors have seen broad shedding of emerging market assets and flights to safe-haven currencies such as the Dollar and Japanese Yen.

In South Africa, lawmakers have also started the process of changing The Constitution to allow government to expropriate property without paying for it. Despite Finance Minister Nhlanhla Nene saying that this will be dealt with in a “responsible manner”, this development could discourage international investors and lead to financial outflows.

With risks of an increase in US rate hike expectations, and South Africans waiting to see what happens with Moody’s investment rating, Rand investors could see potential volatility as events unfold.

Day What’s happening Why it’s important
Wednesday 21 March 2018 FOMC statement and press conference This is when the Federal Reserve Open Market Committee (FOMC) communicates its monetary policy, economic outlook and vote on interest rates.
Friday 23 March 2018 Moody’s Investor Service Rating Decision With South Africa’s current status being one notch above junk status, another downgrade could trigger massive capital outflows.

 

– Craig Jaffa

1st Contact Forex