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Thursday 1st January 1970

Rich Ratings Rally Rand

Rand gained significant strength in the final market trading hours of last week. This trend has been sustained into this data-light four-day week. On Friday, Moody’s Ratings held its credit rating of South Africa above junk status (if only one notch away!). 

 

The decision marked a consolidation and formal acknowledgement of both actual and potential political progress under Cyril Ramaphosa. The accession of the politician to leader of the African National Congress and later to standing national President has propelled the Rand to heights unobserved since 2015. Coming down from highs of 14.50 against the Dollar, the pair is now struggling to survive above 11.50; a strengthening of the Rand against the Dollar in excess of 20%.

 

While the political security of Ramaphosa’s predecessor, Jacob Zuma, looked unbreakable for years, the Rand struggled to maintain strength, no matter what the economy may have produced. The deterioration of institutions under the corrupt President’s rule led to a consistent and unbending series of downgrades across rating agencies.

 

In turn, unsurprisingly, the Rand lost considerable value each time as its credit rating risked dropping out of the elite index of bonds that major investors explore. The concomitant increase in the difficulties that the nation would face when attempting to finance its fiscal expenditure drove the Rand weaker.

 

The ability of Ramaphosa and his new cabinet to serve the country and its political economy better than his predecessor was directly acknowledged by the rating Leviathan in its decision last week. The agency said that “the previous weakening of South Africa’s institutions will gradually reverse”.

 

Whilst the Rand has strengthened, making it a considerably more expensive currency to purchase, the effect has been constrained. The appreciation of the Rand throughout 2018 has reflected traders’ and investors’ evaluation of the sentiment summarised by the agency. Therefore, much of the upside risk was already priced into the domestic currency, making its appreciation less severe than any similar decision in the absence of a change in leadership would have been.

 

Unequivocally, the greatest risk to the Rand remains political: Ramaphosa and the ruling ANC must demonstrate a capacity and commitment to fulfil the expectations that have formed around it. A severe and confident cabinet reshuffle demonstrated the President’s ability and desire to dispel the stagnation that has gripped the South African Economy, despite the perseverance of key figures within Zuma’s administration.

 

Late yesterday evening, rival ratings agency, Standard and Poor’s, provided some positive news for the economy and the Rand alike. The ratings agency announced that it has doubled its growth forecast for South Africa in 2018. Whilst the news might have been expected to propel the Rand to further unforeseen heights, the new forecast for 2018 stands at only 2%; a disappointing level of growth given the country’s level of persistent inflation and status as an emerging market economy.

 

In the US trading session, the Rand even lost a couple of additional points against the Pound Sterling and the US Dollar, grazing past 16.50 against the Pound once again. Distancing itself from its rival, S&P Ratings had previously downgraded South Africa. Not only did the agency not restore the credit rating of Africa’s largest economy to investment grade, they also warned of the distance that stands between the South African economy and a reference of investment grade from the US agency.

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