Pound South African Rand (GBP/ZAR) Exchange Rate Slides as Brexit Pessimism Spooks Markets
This morning, the Pound Sterling South African Rand (GBP/ZAR) exchange rate slipped around 0.5% and the pairing is currently trading at an inter-bank rate of R18.9736.
Data released this morning showed that the UK’s GDP for Q4 2018 rose in line with expectations.
In the three months leading up to December 2018 GDP rose by 0.2%, with growth largely driven by the services sector.
Annual GDP rose to a better-than-forecast 1.4%, however this was still the lowest annual growth since 2012, which likely dampened sentiment in Sterling.
South African Rand (ZAR) Rises despite Impending Moody’s Rating Review
South African markets were on edge ahead of the impending ratings review by Moody’s, which is expected later today.
Some economists were fearful that the power crisis would cost the country its last investment-grade rating.
The other two large ratings agencies, S&P and Fitch, have already downgraded the sovereign bonds to ‘junk’ status.
Commenting on this, Investec Economist Annabel Bishop said:
‘Our long-held view for this year has been that South Africa is likely to see its outlook on its Moody’s long-term debt dual (local and foreign) currency credit ratings drop from stable to negative, but the actual rating remain unchanged at investment-grade.
‘However, Eskom’s huge debt burden and negative impact from load shedding on economic growth now risks an actual Moody’s credit rating downgrade instead. Such a downgrade is estimated to likely see $8 billion – $10 billion flow out of South Africa.’
If Moody’s cut the status to ‘junk’ it would see South Africa removed from the benchmark World Government Bond Index (WGBI), which would likely trigger a sell-off by certain types of investors.
Pound (GBP) Slips as Consumer Confidence Holds Steady
At the start of Friday’s session, data showed that UK GfK consumer confidence held steady at -13 in March despite the forecast rise due to political uncertainty.
However, it is suggested that further declines in consumer confidence are expected over the coming months.
Commenting on the data release, Joe Staton, Client Strategy Director at GfK said:
‘Consumer confidence has held steady this month at minus 13, despite political chaos and ensuing uncertainty as we try to find our rightful place within Europe.
‘However, while UK consumers report a small increase in optimism for their personal finance situation for the coming year, the index is being dragged down by our nagging fears for the general economy.’
South African Rand (ZAR) Rises as SARB Holds Interest Rates Steady
On Thursday, South Africa’s central bank kept interest rates unchanged at 6.75% in a unanimous decision stating the risks to the inflation outlook were ‘more or less evenly balanced.’
However, the South African Reserve Bank (SARB) cut its growth forecast for this year to 1.3% from 1.7% in January, saying this was partly due to the power cuts.
Discussing the risks to South Africa’s growth, the bank’s statement noted:
‘The MPC assesses the risks to the growth forecast to continue to be on the downside. Electricity supply constraints and weak business confidence will likely limit near term production and investment prospects. The Committee remains of the view that current challenges facing the economy are primarily structural in nature. Given current economic vulnerabilities, prudent macroeconomic policies combined with structural reforms that raise potential growth and lower the cost structure of the economy, have become even more urgent.’
Pound South African Rand Outlook: Will GBP/ZAR Exchange Rate Rise if Moody’s Downgrades SA’s Credit Rating?
Looking ahead to later today, Prime Minister Theresa May is going to attempt to gain further support for her Brexit withdrawal agreement.
MPs are expected to vote on the Prime Minister’s deal, with support for the deal being labelled as vital if MPs wish to avoid a disorderly Brexit.
If the vote passes it would secure a delay until 22 May, however if Theresa May is unable to gain the support needed, the Pound (GBP) could slide further against the South African Rand (ZAR).
On Friday evening, South Africa’s Moody’s Investor Service is due to make an announcement on South Africa’s credit rating.
If Moody’s downgrades its credit rating decision this evening, it could cause the Pound South African Rand (GBP/ZAR) exchange rate to rise.