Ten days ago I wrote about our high current account deficit and how it may affect our investment rating, unfortunately last week ratings agency Fitch released their outlook and rated us as unstable, down from stable. Standard and Poor’s followed suite, downgrading our investment rating from BBB to BBB-; considered the lowest investment grade by market participants. They both viewed our growth outlook to under 2%. Not good news for foreign investment and the Rand, it will be interesting to see how the markets react to the news.
I read the latest newsletter by Ashburton, dated 18 June 2014, and I have included this exert:
Although the South African Reserve Bank kept rates unchanged at their last two meetings, they have continuously cautioned the market that in terms of monetary policy, the economy is in the midst of a rate hiking cycle. Why then, given that growth is so weak, would Governor Jill Marcus warn us of this? The large current account deficit is probably one reason. The depreciation in the rand exchange rate should have made our exports more competitive relative to our imports and thereby reduce this deficit. So far, this has not happened and the trade balance has been very slow to adjust (not helped by the mining strikes) and it would take higher interest rates to stave off imports which have largely been driven by consumer spending. Furthermore, with the repo rate currently at 5.5% and inflation above 6%, SA is one of only a few Emerging Markets with negative real rates. To be more competitive in the hunt for foreign capital, the country would need to offer higher real yields to attract foreign investors. Not being able to fund our deficits through foreign investments would add further pressure to the currency which in turn would push inflation even higher.
Ashburton believe that the repo rate will increase to between 6.5% and 7.5% in the next two years. The question is: will the Reserve Bank increase repo rates given our poor GDP outlook and will foreigners still invest in South Africa given our poor investment rating and negative real rate on investment?
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