south african rand

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Junk in our trunk: Moody’s downgrade possible

South Africa finds itself in another sticky situation with a possible downgrade on the horizon.

south african rand

Photo: AdobeStock

South Africa face another risk of a credit downgrade at the end of the month by Moody’s.

Moody’s is expected to issue its next rating review on South Africa at the end of March 2019 and it is being widely speculated that the news won’t be good.

This is the only major investment agency that has not given the country junk status. S&P and Fitch both downgraded SA to junk status in 2018, in response to the surprise cabinet reshuffle and an unfavourable mid-term budget in October 2017.

State-owned enterprises’ large debts are at the forefront of the blame for the possible downgrade.

South Africa’s officials send mixed messages

Mixed messages from the country’s officials regarding Eskom and other state-owned enterprises are not helping.

With Minister of Finance, Tito Mboweni stating that the country may not need these state-owned enterprises anymore and the Deputy President, David Mabuza saying that that is simply the finance minister’s opinion and not the government’s, the state of SOEs in the country remains in a bit of a state.

In addition to high debts, lack of governance within SOE’s is a large part of their issues and as a result the country’s credit rating.

South Africa’s volatile Rand

Fueling this downgrade is the volatility of the Rand over the last two months, which evidently portrays that the markets were expecting a downgrade.

If the South African credit rating is downgraded, the already volatile Rand will suffer losses, which could result in interest rate hikes.

South Africa being dropped from Citi’s WGBI

The downgrade also means that there is a possibility that South Africa may fall out of Citi’s World Government Bond Index.

Being dropped from the Index may increase the country’s borrowing costs, which is a problem because the country already has major dept issues.

Multi-Asset Fund Manager Remi Olu-Pitan, states that even if South Africa’s credit rating is downgraded, that it should continue looking into prospects for growth.

Speaking to eNCA, Remi Olu-Pitan said:

“I think seeing credible plans about how South Africa is restructuring the SOE’s and strong leadership particularly from the private sector coming into the SOE’s to restructure and provide a good growth plan, also having less uncertainty with the political outlook and an improvement in growth,”