Moody's relief boosts rand, SA stocks

Sruthi Shankar - South Africa's markets rallied yesterday, on relief that Moody's had only downgraded its outlook for the country's debt and not cut it to junk as some had feared, while improving prospects of a US-China trade deal sent emerging market currencies to 3-month highs.

The rand jumped nearly 2% to 14.75 per US dollar, leading gains among developing world currencies.

Moody's on Friday reduced the outlook on South Africa's rating to negative, but maintained its sovereign rating at Baa3 - the lowest rung of investment grade.

Markets had anticipated such a move after a bleak mid-term budget statement last week slashed 2019 growth forecast to 0.5% and showed government debt racing to more than 70% of gross domestic product by 2023. The rand shed about 3% last week.

Johannesburg-listed shares rose 0.3% in its fourth session of gains, while yield on the 10-year local bonds dropped about 2.1%.

‘Battle far from over’

"Although South Africa was spared a downgrade to junk (at least for now) ... the uphill battle is far from over. The 2020 Budget will play a crucial role in Moody's next step," Daria Parkhomenko, an FX strategist at RBC wrote in a client note.

The negative outlook means there is a window of 12-18 months in which a downgrade could be delivered, but it could come sooner if Moody's isn't impressed by the fiscal picture presented at the next budget statement in February.

"... a downgrade would exclude local currency SAGB bonds from the World Government Bond Index with a detrimental knock-on effect on portfolio flows and the government's borrowing costs," ING's Trieu Pham wrote. – Nampa/Reuters