South Africa’s rand firmed in early trade on Monday, as traders continued to chase the high yield offered by local assets after S&P Global Ratings decided to downgrade the country’s credit outlook instead of lowering its sovereign rating.
The rand was 0.41% firmer at 14.6750 per dollar by 0620 GMT, compared with an opening level of 14.7300, boosted by optimism about the high carry trade on offer.
Late on Friday, S&P, which along with Fitch already ranks South Africa’s debt at junk, downgraded its outlook for the country to “negative” from “stable”, citing weak economic growth, mounting public debt and bailouts to state power firm Eskom.
S&P’s move to change the outlook rather than lower the headline rating was, however, welcomed by investors as it alleviated, albeit temporarily, some of the negative sentiment over the country’s growth prospects and economic fundamentals, while also shielding the rand from a knee-jerk selloff.
“While the market impact of S&P’s decision should be negligible, it does provide important political cover to the Ramaphosa administration, and to the Treasury in particular, to pursue faster fiscal and structural reform,” said Razia Khan chief Africa economist at Standard Charted.
Since taking over in early 2018 President Cyril Ramaphosa has vowed to get growth going but progress has been slow.
Bonds also firmed, with the yield on the benchmark 2026 paper down 3 basis points to 8.38%.
(Reporting by Mfuneko Toyana; Editing by Aditya Soni)