The SA Daily
08 October 2018
Rand reels from risks
- The rand was the worst-performing emerging market (EM) currency in the first week of October, due mostly to external factors such as European market headwinds; fears of an escalation in the US-China trade war; hawkish Fed rhetoric re-emerging; and elevated oil prices. Amidst the turmoil, the dollar remained well bid, with emerging markets seeing their currencies overshoot.
- While we still see scope for the rand to compress its overshoot because it is still undervalued, two key risks loom: the Moody’s rating review on 12 Oct, and the medium-term budget policy statement (MTBPS) on 24 Oct. Tax revenue might underperform, and disappointing growth could mean a sizeable revenue shortfall. Indeed, Moody’s has warned that SA’s debt metrics and state-owned enterprises are key risks, possibly leading to a change in ratings. A downgrade by Moody’s would see SA expelled from the world government bond index (WGBI), which would incur capital outflows.
- However, the latest tax revenue data (up to August) still not does reflect material tax revenue underperformance. We therefore believe that fiscal underspending, particularly on infrastructure, will counter a revenue shortfall, and so we expect an unchanged rating and outlook at the upcoming Moody’s review.
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