JOHANNESBURG – The rand weakened to more than R15 against the dollar on Monday and bond yields rose minutes after ratings agency Moody’s hinted at a possible downgrade next month, saying South Africa’s growth was unlikely to improve due to lacklustre private sector demand.
Moody’s slashed the country’s growth forecast by more than half to 0.7 percent this year from the 1.5 percent it projected five months ago.
The rand surrendered as much as 0.7 percent to trade at R15.01 against the dollar by 5pm.
Moody’s cited muted consumer demand and the negative impact on the economy caused by Eskom’s load shedding for the change in forecast.
“We attribute the persistent economic weakness to lacklustre domestic private-sector demand - both household spending and investment - and the detrimental impact of widespread power outages on the manufacturing and mining activity,” Moody’s said.
“We forecast South Africa’s economy will grow 0.7 percent in 2020 and 0.9 percent in 2021. “Our sub-1 percent projections reflect our view that the pace of economic activity will remain subdued, well below the country’s potential, over our forecast horizon.”
South Africa’s economy contracted on a quarterly annualised basis by 0.6 percent in the third quarter of 2019.
Moody’s said it expected full-year growth to average 0.3 percent for 2019 as industrial activity remained weak while business and consumer sentiment had also declined over the last two years.
This was a downward revision from as global economic downturn from the Chinese coronavirus outbreak takes a toll on emerging economies.
Senior research analyst at FXTM Lukman Otunuga said the latest move by Moody’s certainly left “a bitter aftertaste” and fostered unease ahead of the ratings decision end of March. Otunuga said the downward review would further heighten the rand’s sensitivity to Finance Minister Tito Mboweni’s Budget speech next Wednesday.
“If the Budget speech fails to offer the detail and insight Moody’s seek, South Africa could lose its last investment-grade credit rating - something that may send the rand tumbling,” Otunuga said.
“The local currency has weakened against every single G10 currency today (Monday), shedding more than 0.5percent against the dollar. A solid daily close above R15 might open the doors for the $/R to challenge R15.10 in the short term.”
Moody’s also reduced its growth forecast for China to 5.2 percent in 2020, due to the spread of the coronavirus. The ratings agency said the downside risks to the global economy would be severe if the coronavirus grows to pandemic proportions.
It said if the outbreak persists, the domestic and international supply chain disruptions were likely to become significant, amplifying the shock to the global economy.
The International Monetary Fund (IMF) has said that the next two weeks would be crucial in determining the economic impact of the coronavirus.
Moody’s vice-president Madhavi Bokil said the negative shock to China’s economy has the potential to harm the stabilisation and recovery of other economies through trade and tourism channels.
“The outbreak will first and foremost hurt China’s economy by lowering discretionary consumer spending on transportation, retail, tourism and entertainment. There is already evidence - albeit anecdotal - that supply chains are being disrupted, including outside China,” Bokil said.
“Furthermore, extended lockdowns in China would have a global impact, given the country’s importance and interconnectedness in the global economy.”
