South African Rand's Relentless Decline Extends in Wake of Fitch Downgrade

- ZAR stumbles at start of new week
- Losses add to a protracted decline
- Fitch cuts SA's rating

Above: Informal traders in Mamelodi, South Africa during the Covid-19 national lockdown. Image © Government of South Africa, reproduced under CC licensing

- GBP/ZAR spot rate at time of publication: 23.38
- Bank transfer rates (indicative): 22.57-22.73
- FX specialist rates (indicative): 23.00-23.17 >> More information

The South African Rand shed further purchasing power at the start of the new week, with market attention remaining fixed on the economic fallout from the global coronavirus pandemic which is expected to leave emerging market nations such as South Africa exposed to protracted economic weakness.

Aiding declines in South Africa's currency is another ratings downgrade: Fitch Ratings downgraded the country’s debt further into junk territory on Friday, a week after Moody’s Investors Service removed its investment-grade credit assessment.

Fitch now assesses the nation’s foreign- and local-currency debt at BB, two steps below investment grade.

The foreign-currency assessment is now the same level as S&P Global Ratings, which demoted South Africa to sub-investment grade exactly three years ago.

Fitch maintain a negative outlook for South Africa's ratings, which means the next move could be a further downgrade.

"Let’s be honest, Fitch is perceived as the lesser brother to S&P and Moody’s, whose ratings impact SA’s standing in global securities indices. Yet, their assessment of risk should still bother us. To have three credit agencies, independent in their thinking and respective methodologies, think SA to be of sub-investment grade standing because it lacks a “clear path towards” stabilising its debt position, is disturbing," says Nema Ramkhelawan-Bhana, an economist at RMB in Johannesburg.

The Pound-to-Rand exchange rate is quoted at 23.45, down 0.25% on the Monday morning open but still up 0.60% on Sunday night's market open.

The U.S. Dollar-Rand exchange rate is meanwhile at 19.07, which is half a percent up on Sunday night's open.

Above: GBP/ZAR is in a solid uptrend

The declines in the Rand could be worse were it not for a broad-based improvement in global investor sentiment, which traditionally tends to create the conditions supportive of ZAR.

Global markets are rallying on Monday April 06 as the number of reported cases of coronavirus and related deaths continues to rise, but at a slower pace. Markets tend to be forward looking in nature and the signal from the global investor community is therefore that a turnaround in the crisis is in the offing.

The South African Rand is traditionally seen as a 'risk on' currency, in that it tends to rally when the world's markets are moving higher and the global outlook is improving.

However, we would have expected a clear recovery in the currency if markets were simply trading the Rand according to 'risk on' and 'risk off' sentiment, suggesting there is an eversion to both Emerging Market currencies in general and the Rand in particular.

Kit Juckes, Head of FX Strategy at Société Générale in London says a key area of focus for him over the near-future is the prospect for a deterioration in Emerging Market (EM) finances.

"Optimism reigns in Asian equities on hope of a flattening pandemic trend. Oil is only slightly softer as OPEC+ is delayed to Thursday, optimism still wins. Asia sold GBP on BoJo hospitalisation but it’s bounced as Europe wakes up. EM defaults may be the next big market test," says Juckes in a note to clients on Monday.

Significant amounts of money borrowed by Emerging Market governments and companies is denominated in U.S. Dollars, therefore a relentless strengthening of the Dollar over recent months will have started to put pressure on the ability of these entities to finance their debt.

Above: The Rand's performance against the world's ten largest freely-traded currencies in 2020

The situation is exacerbated by the global recession that many economists are saying is currently underway, therefore a risk going forward is a jump in defaults on dollar-denominated debt.

A souring in broader investor sentiment towards the emerging market space would likely add pressure to an already struggling Rand.

"SA, like its EM peers, might miss out on the exuberance being expressed in other markets this morning, which have welcomed the decline in covid-19 cases reported across critical points in Europe like Italy and Spain," says Ramkhelawan-Bhana

South Africa is however unique amongst its emerging market peers for having displayed poor fundamental and fiscal dynamics even before the onset of the coroncrisis, which could ensure its current run of weakness can extend.

Above: The Rand has also lost ground against smaller and emerging market peers in 2020

"SA’s public finances are in dire straits and there has been a severe deterioration in SA’s trend growth, a reality not unbeknown to the National Treasury, which is “seized with addressing and minimising the impact of covid-19”. Except, our ability to finance our existing debt load and support health efforts to minimise the impact of local transmissions, is perhaps well beyond the reach of the debt-market," says Ramkhelawan-Bhana.

South Africa's economy is meanwhile likely to sustain substantial damage owing to the ongoing lockdown aimed at slowing the spread of the virus.

While the economic toll of the lockdown is yet to be counted, the health benefits of the measures are apparent.

According to the latest figures out of South Africa, the country has suffered 11 deaths due to covid-19, with 1 655 cases reported from 56 873 tests.