Fitch downgrade is not as bad as it seems

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Izak Odendaal | Investment Strategist | Old Mutual Wealth | mail me |


There was more salt in the wounds for South Africa when Fitch announced that they were downgrading government’s credit rating another notch, this follows the announcing by Moody’s a week ago that they were also downgrading the credit rating.

However, unlike Moody’s decision, this doesn’t change much because Fitch already had us at a sub-investment-grade rating.


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It is worth remembering that credit rating agencies tell us and the markets pretty much what we know already. Therefore the decision was based on the outlook for government debt and weak economic growth, which is not news to anybody.

There are some benefits to a weak Rand. The Rand did take another leg down and it ended Friday at 19 to the dollar, a record low level. But before we get too pessimistic on this, remember that a weak Rand does have some benefits particularly in the sense that it boosts the values of our offshore exposure.

This has helped diversify portfolios at a time when local asset classes have been performing quite poorly. Typically, a weaker Rand would lead to higher inflation and potentially higher interest rates. But we know that with the collapse in the world price, the inflation outlook for South Africa is quite favourable.

Inflation is likely to decline in the next coming months and we know that the Reserve Bank has already cut interest rates by a hundred basis points and could do so further.

All in all, it looks bad and the newspaper headlines will make it seem bad, but there are definite benefits to a weak rand, and we shouldn’t get carried away with this.


 

 



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