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Downgrade risk for SA's sovereign rating is increasing

In June, Fitch confirmed its BBB rating for South Africa with a negative outlook.

This picture taken on 17 January, 2012 shows a close-up of a page of the Ratings agency Fitch website. Picture: AFP.

JOHANNESBURG - Ratings agency Fitch said on Tuesday the risk of a downgrade to South Africa's sovereign rating was increasing.

In June, Fitch confirmed its BBB rating for South Africa with a negative outlook.

"Since we put South Africa on a negative outlook in December 2014, the news flow has largely been negative," said Carmen Altenkirch, director at Fitch Ratings speaking at a conference in London.

The only bright spot being the improvement in current account, she said.

"(However), given how much the rand has depreciated particularly against the dollar we would have expected perhaps a more significant rebound in exports," she added. "On balance, I would think that the risk of a downgrade is increasing."

WEAKER RAND

South Africa's rand reached a new record low against the dollar on Monday after another sharp fall in Chinese shares, while the weaker currency weakened financials and retailers on the stock exchange.

At 15:54 the rand fell 1,03 percent at 14,0175 against the dollar compared with its Friday close of 13,8750.

Trading was lighter than usual with US markets closed for the Labour Day Public holiday, while market watchers shifted their attention back to Asian markets as stocks weakened, led by a slide in China.

Chinese trade data due on Tuesday also added jitters over the health of the world's second largest economy.

"As long as the Chinese economy remains under pressure, so are we," said Ion de Vleeschauwer a forex chief dealer at Bidvest Bank.

China's foreign exchange reserves posted their biggest monthly fall in August reflecting Beijing's attempts to halt a slide in the yuan and stabilise financial markets, but trimmed 2014 growth figures on Monday.

On the back of a weaker rand, yields on government bonds rose across the curve with the benchmark 2026 issue up 5 basis points at 8, 615 percent.

On the bourse, the benchmark Top-40 index ended 0,36 percent lower at 43,389 points and the All-share index, the broadest measure of the South African stock market performance lost 0,52 percent to 48,847 points.

Barclays Africa fared the worst among the JSE's blue-chips, tumbling 5,13 percent to R166, 00 leading financials lower.

Africa's largest grocer, Shoprite, fell five percent to R166,00 the second-biggest faller on the day.

Fashion retailer The Foschini Group shed 3,29 percent to R147,00 while its larger rival Mr Price slipped 3,11 percent to R202,99.

"Because they are big importers, South Africa's retailers tend to weaken if the rand falls," said Petri Redelinghuys, senior trader at Inkunzi Investments.

SARB LACKS AMMUNITION TO DEFEND RAND

South Africa's central bank has little muscle to defend the rand through the upheaval in global markets, with foreign reserves stuck at low levels that could easily be wiped out if it attempted to influence the exchange rate.

South Africa brought its long-standing negative net gold and foreign exchange reserves into balance more than a decade ago, but its position has steadily declined since peaking at nearly $50 billion in February 2012.

This has rendered the Reserve Bank powerless to halt the rand's 21 percent slide against the dollar this year, hitting a record low on Monday, as investors expecting higher US rates dump emerging market assets.

The local unit weakened on Monday after central bank data showed net gold and foreign exchange reserves barely ticked up to $41.244 billion in August.

In June this year, the rand recovered some losses against the dollar after ratings firm Standard and Poor's affirmed a BBB-credit rating along with a stable outlook for Africa's most developed economy.

Prior to the ratings report, the rand had lost nearly 0,8 percent against a greenback buoyed renewed bets of a US rate hike in the fourth quarter and a weaker euro currency.

S&P said growth in Africa's most advanced economy would be limited to 2,1 percent in 2015 due to ongoing power shortages.

Fitch affirmed its own BBB rating, but with a negative outlook last Friday, saying an inadequate and unstable electricity supply had led it to cut economic growth forecasts for the country.

Yields on government paper were mostly up as a global bond sell-off continued, with the benchmark issue due in 2026 adding 1,5 basis points to 8,36 percent.