FOREX Africa: A Rating Downgrade Could Be Good For The South African Rand

The South African rand could strengthen if credit rating agencies downgrade the country’s debt to junk status at the end of this year, according to economist Dawie Roodt.

The country’s struggling economy is facing possible credit downgrades by the global rating agencies Moody’s, Standard & Poor’s and Fitch by the end of the year after escaping the cut in June.

Stuttering economic growth, rising fiscal debt levels and political squabbles ahead of municipal elections are however likely to push the rating over the edge in the next review, Roodt said.

“Based on these three variables, I think chances are very good that we’re going to see a downgrade,” he told Fin24. “Ironically, I think a downgrade will probably lead to an appreciating currency.”

The South African rand, which depreciated 26 percent last year, strengthened extended its 8 percent rally this year after S&P’s held the country’s credit rating at an investment grade above junk.

It is however widely expected to come under pressure if rating agencies eventually lower their ratings in the next round of reviews in December.

The imminent downgrade will make investors perceive debt instruments in the Africa’s second largest economy as riskier and hurt foreign direct inflows into the economy, Mail & Guardian Africa reported.

This could lead to an undervalued currency that present attractive buying opportunities after the run-in.