Rand breaches R13.30/$ on ratings jitters

Cape Town – The rand extended its losses on Tuesday, breaching the R13.30 to the US dollar level as credit rating fears resurfaced.

RMB economist Ilke van Zyl said a credit downgrade could trigger as much as $10bn worth of portfolio outflows from South Africa.

By 13:01 the rand was trading at R13.28/$ after reaching R13.31 earlier in the session.

A recent report from Moody’s flagged ongoing structural growth concerns and worries over the independence of the SA Reserve Bank (SARB) after Public Protector Busisiwe Mkhwebane on June 19 instructed that Parliament must change the Constitution to make SARB’s focus the “socio-economic well-being of citizens” instead of inflation.

The North Gauteng High Court in Pretoria heard on Tuesday that Mkhwebane was in serious error when she ordered SARB’s Constitutional mandate to be changed.

SARB’s counsel formally presented its matter to have the Public Protector’s remedial action set aside.

‘Reckless’ decision

David Unterhalter SC, who represented the SARB, said that although the Public Protector is not opposing the matter, she has failed to apologise or recognise that she took a “reckless” decision in issuing the remedial action.

She had not consulted with the SARB beforehand to understand the consequences that would develop from the “radical” and “destabilising” finding, he said. “It would be sensible to at least tell the SARB this is what you have in mind and ask them what are the consequences.”

He argued that the remedial action could lead to a further credit downgrade, and poor South Africans would suffer the most.

SARB governor Lesetja Kganyago also on Tuesday told Parliament’s standing committee on finance that the SARB is a “creature” of the Constitution and it is mandated to protect financial stability in the country.

“The bank has a duty to protect South Africa’s currency in the interest of balanced and sustainable growth. We are mandated to protect financial stability in South Africa,” Kganyago said.

Ratings agencies have cited the independence of the SARB as a key strength, and any move to erode that could lead to further downgrades, particularly after President Jacob Zuma removed Pravin Gordhan as finance minister in March.

“Should the agency decide to downgrade SA, the local and foreign currency credit ratings will be in the sub-investment category – this will leave only S&P to downgrade for the country to be removed from the coveted World Government Bond Index,” said Van Zyl.

Moody’s is scheduled to decide on SA’s credit rating next Friday August 11, while S&P is expected to release its decision on November 24.

Van Zyl, however, said she doesn’t expect any changes in SA’s credit ratings this year.

“We think the October MTBPS (mini budget) will not show any undue slippage. We forecast another downgrade in 2018 in the absence of sufficient structural reforms,” said Van Zyl.

She said trade data as well as a recovery in portfolio inflows are rand supportive.

The SA trade balance posted another large surplus in June, coming in at R10.7bn. This caused the 2Q17 surplus to jump to R22.8bn — the largest in six-and-a-half years.

Foreigners have also been net buyers of SA bonds over the last 17 days and increased their holdings by R474m on Monday.

“With global FX carry indices sitting at their highest since 2014, valuations of EM currencies and yields are becoming more compelling,” said Van Zyl

 

source http://www.fin24.com/Markets/Currencies/rand-breaches-r1330-on-ratings-jitters-20170801

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