Stronger rand defies ratings cut

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Cape Town – The rand closed firmer on Monday against the expectations of the market following S&P Global Rating’s decision on Friday to downgrade South Africa’s rand-denominated debt to junk status.

S&P Global on Friday evening downgraded SA’s long-term local currency sovereign credit rating to sub-investment grade BB+ (with a stable outlook) from BBB- and the country’s long-term foreign currency sovereign credit rating to BB (stable outlook) from BB-. This followed the earlier foreign currency debt downgrade to junk status in April. 

READ: S&P Global downgrades SA to junk, Moody’s places SA on downgrade review

The JSE remained subdued Monday, as the stronger rand kept the pressure on rand hedge stocks. 

The All-share index fell 0.28% to 60 157 points, while the blue-chip Top 40 index closed 0.35% down. These indices were supported by financials which gained 0.81% on the back of the stronger rand.  

European markets, meanwhile, followed Asian markets lower, while the Dow was up 0.19% after the JSE closed.

Tiger Brands [JSE:TBS] shed 1.45% to trade at R397 a share. The group said revenue grew 2.3% to R31.3bn in the year to end-September, while net profit declined 5.5% to R3bn.

Bruised but not battered 

SA emerged bruised but not completely battered from the latest round sovereign risk rating updates.

Fitch affirmed the country’s BB+ rating with a stable outlook. Moody’s placed SA’s Baa3 foreign and local currency rating on review for downgrade, with the decision to follow the 2018 National Budget in February.

READ: Moody’s keeps SA at investment grade – for now

However, S&P Global downgraded SA’s local currency rating to BB+, one notch below investment grade, and our foreign currency rating to BB, two notches below investment grade, while changing the rating’s outlook to stable.

The downgrade of the local currency rating to junk status by S&P Global, but not by Moody’s, implies that SA’s sovereign bonds will be removed from the Barclays Global Aggregate Bond Index (BGAI), but not from Citi’s World Government Bond Index (WGBI).

Although South Africa avoided the much-dreaded double downgrade – which the Reserve Bank estimated would have trigged forced bond sales of anywhere between $8 billion to $12 billion – the rand nonetheless weakened significantly and bond yields rose further immediately after the ratings updates.

The cryptocurrency madness continued this week, with bitcoin now touching the $9 700 level, up some 900% for the year. It now looks like bitcoin could reach $10 000 in the next few days, boosted by growing signs of mainstream adoption.

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