A WEAKER rand will add to inflationary pressures and lead to higher interest rates, but only have a marginal effect on economic growth, Moody’s said in a report on Thursday.
The rating agency said while it expected government borrowing costs to gradually rise as global liquidity continued to tighten, the steep depreciation in the rand would have a limited effect on the government’s Baa1 rating and negative outlook.
The rand has depreciated by about 5% to the dollar since the beginning of 2014.
Moody’s report was based on answers to frequently asked questions about the credit impact of the election year, politics and the rand’s depreciation. South Africans will vote in a national general election on May 7.
Moody’s said a degree of investor uncertainty was likely to be contributing to the rand’s weakness given this was an election year.
“Uncertainty as to whether the acrimonious political atmosphere could have consequences for the economic policy framework is unnerving foreign investors, who have been pulling some of their money out of the local market in recent months,” the agency said.
It said criticism of the government over the high rate of unemployment, inadequate provision of services and pervasive corruption among officials was leading to “deepening dissent” within the ruling African National Congress and between the party and its alliance partners.
Moody’s said it expected a “more competitive election” this year. More parties have joined the political fray, most notably Julius Malema’s Economic Freedom Fighters and Mamphela Ramphele’s Agang SA.
Moody’s said despite causing a moderation in household spending, the depreciation of the rand would eventually help to narrow the current account deficit by boosting net exports.
The rating agency said interest rates would likely only be increased to the extent warranted to keep inflation within bounds and prevent the “second-round impact” of the depreciation from taking hold.
The Reserve Bank’s monetary policy committee raised interest rates by 50 basis points in January, with economists forecasting that rates would have gone up by 150-200 basis points by the end of 2014.
South Africa’s “very low” exposure to foreign currency-denominated debt would also mitigate the economic effects of the rand’s depreciation, according to Moody’s.
“The total foreign currency debt of the country was equivalent to only 16% of GDP (gross domestic product) at the end of June 2013, much lower than for most of the country’s Baa-rated peers,” it said.
The rating agency expected that the rand’s weakness would have a limited effect on the government’s fiscal strength because of the “favourable currency composition, interest-rate structure and elongated maturity profile of its debt”.
“The sovereign’s low exposure to exchange rate and interest rate volatility is a key credit strength,” Moody’s said.