Moody’s cautions SA against debt trap
Credit ratings agency Moody’s Investors Service has cautioned that if the rand continues to weaken, SA may struggle to raise funds and service its foreign debt, although its vulnerability to tightening global financing conditions remains low.
SA’s public debt has ballooned to more than 50% of GDP over the past decade and analysts are warning that the country is falling into a debt trap.
“Tightening external conditions can affect the overall cost of debt for the government, both through the availability and cost of external finance and if currency pressure leads the South African Reserve Bank to raise policy rates significantly,” reads a report released by Moody’s senior credit officer, Lucie Villa, on Tuesday.
The rand has depreciated 14% against the dollar during the second quarter, while portfolio outflows came to about $6.4bn, according to data Institute of International Finance (IFF) data.
This has been in the context of the US trade wars, selling-off in emerging markets, portfolio outflows and local wage issues.
“The rand is caught up in the international noise and should start to recoup some of its losses as the dust begins to settle,” said Andre Botha, senior currency dealer at TreasuryONE.
“With the intensifying trade war between the US and China, this uncertainty is placing pressure on emerging markets and their currencies, creating an increasingly volatile investment landscape for fund managers to navigate,” said Grant Watson, a portfolio manager at Old Mutual Investment Group.
The IFF also reported that SA’s current account deficit had widened to 4.8% of GDP in the first quarter of 2018, from 2.5% in 2017 as a whole, due to a change in terms of trade and decreasing export volumes.
Moody’s said that it expected the end-year current account deficit to exceed its previous forecast of 2.7% of GDP for this year, which would not be fully financed by foreign direct investment and other capital inflows.
“As a result, foreign exchange reserves are likely to decline to about $38bn by the end of 2018,” it said.
However, the structure of external debt implied that the country’s capacity to meet external payments was greater than implied by this coverage ratio, Moody’s said.
Moody’s is the last of the three major rating agencies to rate the country’s debt at investment grade.
It affirmed that rating in March and revised its outlook to stable from negative, citing an improving policy framework.
The next review is expected on October 12.
Rating agencies Fitch and S&P Global have rated SA’s sovereign debt as subinvestment grade.
Villa warned, however, that a “marked shift” in the country’s monetary policy stance “represents a downside risk to our baseline assumptions”.
A number of interest rate hikes were now occurring to increase the attractiveness of interest rate differentials between emerging markets and developed economies, said Investec chief economist Annabel Bishop.
While inflation has surprised on the downside in the past two months, analysts are confident there will not be another interest rate cut before in the second half of 2019.
Potential further depreciation of the rand would not lead to substantially tighter monetary policy, because inflation remained well anchored within the Bank’s target range of 3% to 6%, Villa said.
Inflation trumped expectations and fell to 4.4% at the end of May.
“The depreciation of the rand began around the same time as the VAT rate hike, and, combined, these two factors could raise inflation more significantly than we currently expect,” Villa said.