The South African rand reached a 4-month best against the dollar on Thursday after ratings agency Fitch chose to hold the country’s rating.

While Fitch junked South Africa’s credit rating some time ago, the decision to hold off pushing it further into sub-investment grade was welcome news.

The agency said that South Africa’s ratings are constrained by low growth potential, high and rising government debt, large contingent liabilities as well as the risk of rising social tensions due to extremely high inequality.

Despite this, however, the ratings remain supported by strong macroeconomic institutions, a favourable government debt structure and deep local capital markets.

The rating was held at BB+ or one notch below junk level, with a negative outlook.

The negative outlook reflects uncertainty about the ability of the government to stabilise public debt over the medium term, it said, highlighting in particular the over reliance of state companies on government bailouts.

It warned that a downgrade could be triggered if the South African government cannot get a hold in its debt.

National Treasury acknowledged the firm’s position, saying that it “remains committed to the stabilisation and improvement of its fiscal position”.

“The agency acknowledges government’s plans to stabilise its finances in order to achieve a balanced primary budget balance. Further, government will continue to work hand-in-hand with unions to manage the growth of the public sector wage bill in order to reduce government’s debt burden.

“Government is also cognisant of the pressures and risks that state owned companies, particularly Eskom, present to the fiscal framework. Government is providing medium- term support to Eskom to secure energy supply and to honour the state’s contractual obligations,” it said.

Rand

Fitch’s hold on ratings was good news for the rand, which strengthened to below R14.30 against the dollar after the news broke, stabilising around R14.31 to the dollar on Thursday.

While the rating decision was supportive, the rand’s rise is largely being driven by the global trade war talk, with progress in discussions between the US and China being seen.

On Monday Washington said it would reduce some tariffs in exchange for what US officials said would be a big jump in Chinese purchases of American farm products and other goods.

“It’s been a steady grind lower for the rand since US markets opened and that’s down to a technical break below 14.30, that saw some stop-losses triggered,” said senior dealer at Standard Bank, Oliver Alwar, referring to the dollar/rand graph.

“There’s also some decent exporter interest as we head into year-end,” he said. “But due to the low liquidity I’d say most of the momentum is still coming from trade deal optimism.”

According to Bianca Botes, Treasury Partner at Peregrine Treasury Solutions, the rand was also aided by a flat dollar off the back of impeachment proceedings in the US.

While the US democrats were successful in impeaching president Donald Trump, the follow-through depends on prosecution, which in the Republican-controlled Senate, is unlikely.

“The dollar remained flat after the House of Representatives voted to impeach Trump, given the likelihood that Trump will be acquitted once the vote goes to the Senate.

“The UK will publish retail sales today, while the BOE is set to release its interest rate decision. We then turn our attention to the US for initial jobless claims and existing home sales,” she said.

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