There has yet again been talk about junk status in the market

The strengthening of the rand is good news for South Africa in terms of inflation and interest rates. However, political and economic risks still exist and the good news is perhaps not enough to avoid being downgraded to junk status.

 

The rand’s performance amid these rumours

On August 10th, the rand traded at R13.20 against the dollar- the best this year and far better than the lowest point in January when the rand traded at R18 against the dollar.

The rand weakened drastically after President Jacob Zuma fired the minister of finance, Nhlanhla Nene in December, and from there it continued getting worse. Although, since the appointment of Pravin Gordan as minister of finance in June, the rand has strengthened greatly and in the last month we saw weekly improvements to reach the current R13.30 against the dollar.

Results from the municipal elections have also been seen as very positive by traders- mining and production figures were better than expected and the fuel price is busy going down.

A slight downturn for the rand yesterday, since Fed’s Stanley Fischer’s announcement of possible interest rate hikes in America and the rand may keep fluctuating until Friday, when Janet Yellen has to address the World Bank regarding the Federal Bank in America’s interest rate policy.

The rand seems to be performing favourably, so why the rumours?

Credit rating agencies look at growth potential of a country, employment opportunities, political stability and unemployment rates and unfortunately these are factors play a big role when looking at South Africa’s overall status.

A downgrade to junk status would have detrimental effects on South Africa’s economy and could potentially lead to the loss of 200 000 job opportunities.

The key will be for the government to prove that public finances are under control, growth prospects improve, labor relations have stabilized and that there is less policy uncertainty.

In addition, the agencies will also be watching very closely at what happens in municipalities where coalitions are formed to show that management is properly established.

Advice for investors during these uncertain times

It remains crucial to get advice from an accredited financial advisor and to ensure you have a diversified portfolio. Look carefully at exactly how your diversification works so that you will not be affected on a large scale, both short and long term, in the event of something drastic happening, like being downgraded to junk status.