By Wichard Cilliers
(TreasuryONE) – The big news over the weekend is that Moody’s downgraded South Africa’s sovereign credit rating to sub-investment or junk status on Friday, heaping more pain on an economy already in recession and now staring down the barrel of a steep contraction over the global coronavirus pandemic.
The ratings firm downgraded the rating one notch to ‘Ba1’ from ‘Baa3’ and maintained a negative outlook, meaning another downgrade could follow if the economy performs worse or government debt rises faster than expected. Moody’s expects South Africa’s economy to contract by 2.5% in 2020 and our debt to GDP to rise to 91% in 2023.
The big worry for the currency is the latest downgrade will see South Africa kicked out of the benchmark World Government Bond Index (WGBI) of local-currency debt, which could trigger a massive outflow of an estimated $11bn. However, the rebalancing of the WGBI has been postponed until the end of April, which will only delay the selling by the passive index trackers.
The active managers could potentially already have rebalanced themselves as we have seen outflows of around $4bn by foreigners over the past month. They can also potentially rebalance over the next month as well. This could soften the blow to the currency.
The rand has been the worse performing emerging market currency over the past week and traded at its weakest level ever at R18.05 in Asia early this morning. The local currency is 17% weaker over the past month.
In the rest of the world, the coronavirus pandemic is ruling the headlines. President Donald Trump of the US announced yesterday that the current social distancing guidelines will remain in place until 30 April. The world economy is heading to its worse downturn in almost a century as we are heading for the similar depression that was seen in the 1930s.
Oil is again under massive pressure as with the continued lockdowns the demand for oil is continuing its downward spiral. Crude oil dipped below $20 a barrel testing levels last seen in 2002. Gold is holding up at over $1,600 an ounce after we had one of the biggest weekly rallies in gold the past week. For the week ahead we will start seeing some March 2020 data coming out and to get an idea of how the data is looking. We end the week with US non-farm payrolls out of the US, with expectations that there will be a downturn. The US also releases its unemployment numbers and this is expected to jump up at 4% again.
We in South Africa must really hope that the current government has the political will to turn the ship around, otherwise, we are in for a real torrid time. The economy is struggling and with the prolonged lockdown, we will suffer even more.
We all need to work together in these trying times but we also need the government to take a strong stance. All unnecessary spending and corruption need to be stamped out. We do not want to go to the IMF for a bailout as the restrictions they will impose will not be pretty. Stay safe out there and we need to keep our eyes on the international market for an idea where our currency is heading.
