Fed move could bring emerging markets tailspin – analyst

Peregrine Treasury Solutions partner Bianca Botes wrote in a
circular on Friday evening that the Fitch sovereign rating for the South
African economy was in line with currency data for the week, which was roundly
positive for larger economies.

Fitch announced maintained South Africa’s BB+ score, but revised
its outlook for the country from stable to negative, citing poor GDP growth and
continued financial assistance for beleaguered state-owned entities, especially
Eskom.

Botes said the rand responded
to United States GDP gaining 2.1% quarter-on-quarter annualised for the second
quarter of 2019.

Botes wrote that a negative spike was
further compounded by Fitch’s announcement shortly after close of trade on
Friday that it had revised the outlook on South Africa’s sovereign debt
downwards from stable to negative.

“Although the rating agency has
maintained its score of BB+ for SA, an outlook downgrade generally precedes a
rating downgrade. By Friday evening the rand’s selloff saw the
currency touching R14.30/$, trading over 3% weaker than the opening rates on
Thursday,” Botes wrote.

Botes said The resilience of
the US economy was  evidenced in the
ongoing strong GDP numbers as well as employment figures.

“With the dollar trading at two-week
highs, the rand is feeling the pinch. Any move by the Fed, walking back their
initial dovish outlook, will see the emerging markets go in to a tailspin
targeting R14.50 as the next level,” Botes said.

National Treasury, in response to the ratings announcement, said
it remained committed to getting Eskom and other South African state-owned entities
in shape and productive.