The MTBS, Moody's ratings and outlook for the ZAR

In this article we review the Mini Budget Speech, look at what could be the next ratings action by Moody’s Investor Relations, as well how the rand is setting up for traders amidst the news.

The rand has been volatile as of late, taking most of its directional cues in the last week from factors domestic. In this article we review the Mini Budget Speech, look at what could be the next ratings action by Moody’s Investor Relations, as well how the rand is setting up for traders amidst the news.

The chart below highlights recent movements in the rand which have been exaggerated by the Finance Ministers Mini Budget Speech and subsequent ratings review from Moody’s Investor relations.

The Mid-Term Budget Speech (MTBPS)

The MTBPS delivered by Finance Minister Mr Tito Mboweni painted a relatively dire outlook for the South African economy and budget, which was met with disdain by the market in fear of a ratings downgrade to follow.

Some of the salient features of the speech were as follows:

  • South Africa’s 2019/2020 shortfall in gross tax revenue is expected to be R52.5bn
  • Gross Domestic Product (GDP) growth has been revised to 0.5% in 2019 from 1.5% forecast in February’s budget.
  • The budget deficit is expected to average 6.2% of GDP over the next three years
  • Gross debt is projected to increase from 61% of GDP this fiscal year to 71.3% of GDP by 2022/2023
  • State-Owned Entities (SOE’s) will no longer receive bailouts but rather loans, which would have to be repaid with interest
  • SAA is currently involved in conversations with potential equity partners
  • Government will help Eskom although with terms and conditions, and restructuring efforts need to be fast tracked
  • NPA and SARS will receive additional funding to aid the fight against corruption and improve revenue collection
  • Personal taxes may need to be increased to raise an extra R50bn per annum over the next three years.
  • The rollout of the National Health Insurance will require an additional R33bn p.a. from the 2025/26 financial year and is still under consideration

Moody’s Investor relations

Leading into the weekend (commencing the 1st of November 2019), Moody’s Investor relations released an updated review on the South African economy, in which the agency has lowered the credit rating outlook for South Africa from ‘stable’ to ‘negative’. The change in outlook rather than an investment downgrade, means that South Africa has avoided ‘junk’ status for the time being. Subsequently we have seen the rand renew strength expressing some short-term relief on the rating’s outcome.

While there has been short term reprieve reflected in the ZAR from the Moody’s decision, the longer-term outlook for South Africa’s local currency credit rating remains under pressure. South Africa will need to show signs of progress/implementation in the Eskom turnaround strategy, tax collections and expenditure. The Moody’s suggestion is that the current path of state finances is unsustainable.

Moody’s will review South Africa’s credit worthiness after the next Budget Speech scheduled for February 2020. The probability of a ratings downgrade has now been increased greatly and is an expected outcome following the next meeting.

The USD/ZAR

Circled red we see a bearish price reversal pattern (Harami) on the USD/ZAR at overbought territory. The reversal pattern reflected a tentative expectation of the underlying Moody’s data release. The reversal was correct in predicting a short-term direction change in the USD/ZAR from up to down.

The support range between levels R14.60/$ and R14.50/$ is the current target from the move lower. Traders might look for a bullish price reversal from oversold territory around these support levels to find long entry into the USD/ZAR. In this scenario gap resistance at R15.00/$ would be the initial upside target. Should the USD/ZAR however move to close below the R14.50/$, mark it would suggest further USD (weakness)/ZAR (strength) to follow instead.


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