ESKOM Rating down, Rand jittery

A variety of external factors and voices are still affecting the South African Rand and its performance:

h3. ESKOM Credit Rating

p. A week after lowering government’s sovereign credit ratings outlook to negative, Fitch has lowered Eskom’s outlook from stable to negative. Similarly, S&P has reduced ESKOM’s credit rating by one notch from BBB to BBB-, with a negative outlook. S&P highlighted on-going funding risks, escalating costs and overall sluggish credit metrics as factors posing risks to a further downgrade to junk status.

p. This does not come as much of a surprise given that parastatals typically get downgraded following a government credit rating downgrade.

h3. Rand Update

p. Overnight, the HSBC China manufacturing PMI came in greater than expected in June, driven by recovering new orders. Asian stocks have taken positively to the result as a proxy for stabilisation in export demand. The local unit, however, has been underperforming the broader Emerging Market (EM) complex in response, albeit marginally. Though the rand is likely to reap some of the benefit as the local/London session gets underway, it perhaps speaks to a market that is sceptical of how such a Chinese demand revival will impact the local economy when strike action continues to threaten the mining sector.

p. Structurally, inadequate labour policy and the frequency of strike action is a negative for long-term capital investment, but in the short term some degree of certainty in physical production will help to alleviate some of the fear factor in the Rand. Nonetheless South Africa – against Minister Nene’s perception – is in a cyclical downturn where demand is being retrenched as inflation rises. Typically such a downturn and reining in of money and credit growth is a rand positive over time but this assumes a central bank that is tightening policy adequately, which the South African Reserve Bank (SARB) currently is not.

p. Therefore the Rand is still exposed to a level of short-term fragility by way of deeper negative-real rates.

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