The depreciation of South Africa's currency, the rand, will have a limited effect on the country's Baa1 rating and the negative outlook as it will lead to marginally lower growth than had been expected in 2014, according to a Moody's report. However, the rand depreciation is expected to increase the inflationary pressures and lead to higher interest rates.
In January, South African Reserve Bank (SARB) increased its key repo rate by 50bps to 5.5% envisaging further pressures on the exchange rate and aiming to keep inflation under control.
Moody's forecasts that the weakening of the rand will eventually help reduce the current account deficit by boosting exports. In 2013, South Africa's trade gap widened two-fold to ZAR 69.91bn (EUR 4.7bn) from ZAR 34.68bn a year earlier.
Moody's noted also that South Africa has very low exposure to foreign currency-denominated debt, which will also diminish the economic impact of the rand depreciation. The country's total foreign currency debt was equivalent to 16% of GDP as of the end of June 2013. The sovereign's low exposure to exchange rate and interest rate volatility is a key credit strength.
According to Moody's, South Africa's government borrowing costs are expected to gradually rise as global liquidity continues to tighten.
The rating agency also noted that the general elections this year provoke some investor uncertainty that could contribute to the rand's weakness. Earlier this month, South Africa's President Jacob Zuma announced that he has set May 7 as the date for the country's fifth general elections as the electoral term of the present government will come to an end on April 22.
President's ruling African National Congress is likely to win with comfortable majority and easily extend its two-decades rule. Anger, however, is mounting against the movement, which spearheaded the fight against apartheid, but now faces charges of failing to lift millions of blacks out of grinding poverty. ANC won nearly two thirds of the vote in the last elections in 2009.