Rating agencies may come knocking

It is only the middle of February, but the rand has already made two big moves. The first was the rand moving from R14.60 to R 13.20 at the beginning of the year, as emerging markets (EM) became fashionable again. The second was where the rand gave away nearly 90 cents in 2 weeks as the EM rally ran out of steam, and local events started to hit the headlines.

The rand has been on the back foot for the past couple of weeks, with the initial weaker moves being attributed to emerging markets (EM) moving too far too quickly, warranting a phase of correction.

The next move happened after the State of the Nation Address (SONA) when Eskom started with load shedding. The rand lost ground as serious questions arose about the financial status of the energy provider, with Public Enterprises Minister Pravin Gordhan stating that Eskom is practically insolvent.

With a failing energy provider, economic growth will come under scrutiny and rating agencies will come knocking. There is a real possibility that South Africa will be downgraded again this year. 

Apart from the local issues, international factors that played a role in EM's losing some ground was the US dollar that ran stronger and quite aggressively on the back of good data out of the US and bad data out of the Eurozone. This has caused the EURUSD to trade in the low 1.1200 last week after trading at 1.15 only a few weeks back. Such a US dollar move is bound to have an adverse effect on EM.

The beginning of last week also saw some rumours that the US-China trade talks were not going as planned. However, those rumours have been quelled – at least for the time being – with another round of negotiations scheduled in Washington and President Donald Trump stating that a resolution could be on the table.

This should help EM sentiment, but we have not seen that coming through in the market yesterday, as the US were out of action celebrating Presidents’ Day. 

With the rand on the back foot already, it is not the ideal place to start, as we have the 2019 Budget Speech on Wednesday. The Budget Speech has probably been priced into the market already, but we can expect a knee-jerk reaction after the speech as the budget is revealed.

The key issues will be how Eskom and other SOE's will be funded and how much of an extra burden there will be on the taxpayer. Another issue will be whether the budget has increased or if a sustainable path can be found going forward. The market will keep a close watch on the Budget Speech, and it is easy to see that the rand could take a turn for the worse should it be poorer than expected. 

The rand rollercoaster has been in full swing and we haven't even reached the business end of the year when a volatile rand can be expected. We are at the start of the gauntlet and some rough, volatile days are ahead. 

To catch up on today’s market commentary, have a look at the TreasuryONE blog which is updated daily.