The rand weakened against the dollar on Wednesday after Standard & Poor’s, the rating agency, downgraded South Africa’s outlook to negative from stable, citing structural economic and social problems. The agency said South Africa’s near-term political pressures had eased and the Treasury remained committed to fiscal consolidation, but added that problems such as high unemployment and a structural current-account deficit persisted. "The negative outlook reflects the potential for a downgrade if economic and social problems feed into the political debate in the run-up to the 2014 elections and consequently further put pressure on the policy framework," S&P said.
It reaffirmed South Africa’s foreign and local currency ratings at BBB+/A-2 and A/A-1. The rand weakened to R7,665 to the dollar from R7,643 just before the S&P release. By about 3.30pm local time, it was at R7,6698 to the dollar. The currency, which had been weakening in earlier trading, was down about 0,7% after the announcement. Government bonds also fell, with the yield on the three-year benchmark bond rising to 6,85% from 6,81% before.
This is the third outlook downgrade in four months for Africa’s biggest economy. Fitch cut its outlook to negative in January following a similar move from Moody’s in November. Both agencies cited political pressure as the reason for their move. The fact that S&P did not put South Africa’s rating on credit watch meant the chances of a cut in the short term were limited, said Peter Attard Montalto, emerging-markets analyst at Nomura, the Japanese investment bank. "It is only the course of medium-run policy dynamics that will perhaps eventually lead to a downgrade. Market reaction is likely to be somewhat contained given the risks S&P talk about are already well known," Mr Montalto added.
Source: Business Day
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