South African Rand Forecast Downgraded at Standard Bank Citing Lack of Progress on Reforms and Eskom Costs

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- Rand expected to weaken over the next year

- Early promise of Ramaphosa regime not yet fulfilled

- Eskom becoming costly burden to public purse

The outlook for the Rand has deteriorated, according to Johannesburg based Standard Bank, who have revised down their end of year forecasts.

Driving the forecast downgrade at one of South Africa's largest lenders is the observation that the ‘new broom’ reform promised by President Cyril Ramaphosa’s election is not materialising.

An additional reason for the downgrade is the significant, and increasing, burden of Eskom on the public purse.

“Due to the significant further fiscal support by government to Eskom, and tardy momentum with policy interventions to improve the economic growth and fiscal prognoses, we now trim our rand forecasts,” says Shireen Darmalingam, an economist at Standard Bank.

The revision coincides with a warning from Moody’s, the world’s largest credit rating agency, that government bailouts of Eskom are a concern from a fiscal standpoint.

Moody’s is the last major rating agency to maintain South Africa at investment grade - both Fitch and S&P having downgraded the country to sub-investment grade or ‘junk’ status. If Moody’s were to follow suit it would lead to massive outflows of foreign credit and a probable run on the Rand.

The warnings came after the full extent of Eskom’s losses emerged and the company reported a staggering R20.7bn loss after tax for the financial year in March, from only R2.3bn loss in the previous year.

“Newly appointed chairperson Jabu Mabuza said these losses were due to unavoidable factors, noting that Eskom is mindful that “the challenges cannot be solved in isolation” and that it “requires a partnership approach from stakeholders to achieve success”,” says Standard Bank’s Darmalingam. “Municipal and Soweto municipal debt in arrears, however, continues to climb, and payment levels have declined further. Moody’s has warned of the increasing debt burden of state companies.”

On Monday Fitch downgraded its outlook for SA from neutral to negative due to “fiscal deterioration” because of lower government revenue, higher spending, higher debt and Eskom support.

“Fitch is clearly sceptical about government implementing policy changes to improve the fiscal and growth prognoses. The outlook downgrade came quite unexpectedly,” said Standard in a note on Monday.

Data out on Tuesday, which showed an unexpected rise in unemployment, a major socio-economic bugbear for SA, further heaped woe on the outlook, after the unemployment rate rose to 29.0% in Q2 from 27.6% in Q1.

“The number of unemployed increased to 6.655 million in Q2:19, from 6.201 million in Q1:19.” said Darmalingham.

“The weakness, however, in formal employment clearly underscores the downside risk to household consumption expenditure (HCE) and tax revenues.”

Youth unemployment is particularly stark with “people aged 15-24 years bearing the brunt, at an unemployment rate of 55.1% in Q1:19.”

President Cyril Ramaphosa promised to create 2 million jobs for youth over the next decade in his June State of the Nation Address. He further noted that the expanded public works programme, the youth unemployment service and the national youth service would continue in aiding a reduction in unemployment amongst the youth.

Yet Standard Bank’s Darmalingham is skeptical, saying “Economic reforms are now more pressing than ever but progress thus far hasn’t been discernible.”

Standard Bank now forecast the USD/ZAR exchange rate to trade at R14.00/$ at end-2019 and end 2020, from R13.80/$.

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