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Rand skims 3-month low on ratings news

Two ratings agencies revealed major doubts around the South African economy on Friday.

Two ratings agencies revealed major doubts around the South African economy on Friday. Picture: File.

JOHANNESBURG - The rand briefly touched a three-month low against the dollar on Friday after ratings agencies Fitch and Standard & Poor's (S&P) delivered dramatic announcements on the South African economy.

On Friday morning, Fitch lowered its outlook for the country's financial status from stable to negative, signalling at a possible credit rating downgrade in December, and adjusted its forecast for economic growth down to just 1.7 percent.

S&P took a bolder move by downgrading the credit rating from BBB to BBB-, just one step away from 'junk' status, while its growth forecast fell to 1.9 percent.

Both agencies cited concerns about the crippling strike on the platinum belt, coupled with weak demand and the contraction in the first quarter, with unstable electricity supply a major feature for Fitch.

Fitch also raised questions around President Jacob Zuma's new Cabinet, while S&P suggested the ruling African National Congress has failed to deliver on its otherwise promising economic plan.

At its worst, the rand dipped 1.3 percent to a low of R10.81 to the US dollar on the back of the news, reaching its weakest point since late March.

By around 6pm, however, the currency had recovered to just over R10.68, down 0.11 percent from its previous close.

Government bonds took the ratings announcements largely in their stride, with the yield on the benchmark 2026 issue ending only five basis points higher at 8.415 percent while the instrument maturing in 2015 added just 1.5 basis points to 6.7 percent.

"Market reaction is blunted by the fact that a risk of a downgrade had largely been priced in," notes Standard Chartered analyst Razia Khan. "Moreover, some had even spoken of the likelihood of a two-notch downgrade from S&P."

Markets were also cheered by signs that a wage deal was imminent between the Association of Mineworkers and Construction Union the three platinum producers where some 70,000 of its members are on strike.

The news signals a possible end to the crippling five-month strike that has disrupted global output of the metal, as well as the South African economy overall.

In response to the downgrade, Treasury said it was committed to reducing the budget deficit and was confident it would still be able to access capital markets for foreign currency funding.

In its statement, it also acknowledged the negative impact on the economy of the industrial action, signalling at further consideration of a recent proposal to give government greater powers to end such damaging strike.

'SA URGENTLY NEEDS TO IMPLEMENT NDP'

Old Mutual says the downgrade of South Africa's foreign currency outlook by the Standard & Poor's (S&P) rating agency signals the urgent need for government to implement the National Development Plan.

S&P downgraded South Africa's rating from triple B to triple B minus on Friday and Old Mutual's wealth division says this is very significant.

The agency attributed the downgrade to negative growth of the country's GDP and the ongoing platinum wage strike.

"The downgrade does not come as a complete surprise but what we do think is the fact that we have been downgraded and we are only one notch away from a non-investment rate status emphasises the urgency that the government has to implement the National Development Programme."

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