Why South African Rand Could Weaken Ahead of Moody’s Credit Rating Decision

South Africa is the second
largest economy in Africa, with a GDP of more than $345 billion. The country is
also the most advanced in the continent, with its infrastructure being more
advanced. The country has a diversified economy, with most Western countries
having a base there. For example, South Africa is the biggest automobile
manufacturer in Africa, producing more than 500K cars every year. Some of the
companies with operations there are Ford, Fiat, Nissan, and Toyota.

For years, the country’s economy
was on an upward trajectory. This is because the country’s sectors were all
doing well. For example, the mining sector was doing very well that it employed
hundreds of thousands of people.

However, poor governance and
increase in corruption led the country to self-destruct. For example, in the
past few years, the number of people in the mining sector have continued to
decline. The output from the mines has also reduced. All this has seen the
country’s GDP decrease from more than $411 billion in 2011 to the current
figure of $349 billion.

The focus among investors is a
report by Moody’s, which is expected to be released in March. The report will
give investors a read on the fiscal position. Currently, the country’s Moody’s
rating is at Baa3, which is a notch higher than the sub-investment grade. Any
reading below this – Ba1, Ba2, and Ba3 – will mean that the country will be in
junk status. A junk status leads to capital flight and higher interest rates on
the debt. The country has a national debt of more than $209 billion. To improve
the situation, the country announced plans to reduce public spending in this
year’s budget reading. Therefore, Moody’s will want to know whether the budget
cuts go far enough.

This year started with the South
African rand gaining against the USD. However, this has changed recently as
investors wait for the Moody’s decision. This has made the pair rise to a high
of 14.38, which is slightly higher than the YTD low of 13.25. In the coming
week, the pair will likely continue moving higher as investors wait for the
decision by Moody’s.

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