ZAR likely to remain cautious on scope of rating downgrade in coming autumn, says Commerzbank

ZAR investors are advised to exercise caution against a background of rating downgrade threat, probably in the coming autumn, according to the latest research report from Commerzbank.

Like other EM currencies, the rand rallied noticeably in the past two weeks. This was mainly due to the prospect of imminent monetary easing by the Fed and the ECB in the near future. Another supportive factor was a certain calming of the trade dispute between China and the USA after the G-20 summit.

Economic indicators have recently continued to paint a picture of an economy lacking investment and on the brink of recession. Leading indicators such as business confidence and the Purchasing Managers' Index do not suggest an improvement; they have recently remained at low levels resp. in recessionary territory, the report added.

The economic recovery stands or falls with the financial restructuring and the reorganization of the highly indebted state-owned companies, above all the power utility. In his state-of-the-nation address the president did not announce a timeline or any concrete information on the planned reconfiguration into three parts.

However, it is clear that the company needs further financial support in addition to the 230 billion rand already promised for the next 10 years. The president has suggested to bring forward part of the promised financial injections which would mean additional bond issuance. However, this is at odds with the need for consolidation in public finances, Commerzbank further noted.