Weak South African rand sours investment mood ahead of ratings decision

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A feared credit downgrade for South Africa to “junk” could see direct investment in the ailing economy slide further as investors flee to other markets in search of higher returns.

Standard and Poor’s, which ranks Africa’s most industrialised country just one step above subinvestment grade, is due to make its rating decision public on Friday.

Some analysts believe a credit downgrade to subinvestment has already been priced into the currency, but they do not rule out a selloff after the decision.

The Treasury says Fitch, which also puts South Africa’s credit one notch above speculative grade, will release its decision on June 8.

“There may be some short-term volatility but I don’t see it going to 20 rand to the dollar,” said Lesiba Mothata, chief economist at Investment Solutions.

“But if they move on the local debt or on the outlook, I think it’s ominous.”

The rand was trading at 15.6500 to the dollar, down 26 percent against the dollar since the beginning of 2015.

The currency tumbled to its worst ever level of 17.995 in January, a month after Fitch lowered South Africa’s rating to one step above subinvestment grade.

The weaker rand, combined with sluggish economic growth estimated at less than one percent this year, rising interest rates, low levels of consumer and business confidence and the looming downgrade have put off foreign investors.

Flows of foreign direct investment (FDI) into South Africa fell 64 percent, or 40 billion rand, between 2014 and 2015, according to data from the South African Reserve Bank.

The slide in FDI will continue due to the weak exchange rate triggering higher inflation and borrowing costs that eat away at both investor profits and business confidence, analysts said, warning that political upheavals had also cast a cloud.

In local elections in August, President Jacob Zuma’s African National Congress faces a strong challenge from opponents seeking to capitalize on what they see as his economic and political missteps.

In December Zuma changed his finance minister twice in a week, sending the rand plummeting. He survived an impeachment vote in April called after the Constitutional Court said he breached the law by ignoring an order to repay some state funds spent on renovating his home.

“Currency risk is just a symptom of political risk. If the politics is sorted, currency risk will be mitigated,” said Azwimpheleli Langalanga, economics fellow at the South African Institute of International Affairs.

A measure of global FDI confidence by consultancy A.T. Kearney in May said South Africa had failed to make the top 25 of destinations for investments, and fixed capital formation remained subdued as the economy edges towards recession.

Some companies, including cement maker PPC and Nampak are setting up new business units in other parts of Africa, seeking higher returns and protection against the weak currency.

“The rate of return on capital employed in South Africa is just too low. Too low to entice businesses to invest, whether they’re a domestic business or a foreign business,” said Arthur Kamp, economist at Sanlam Investments

 

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