After shedding 26% last year, the iShares MSCI South Africa ETF (NYSEArca: EZA) is struggling to rebound in 2016 as largest single-country exchange traded fund tracking an African economy is sporting a double-digit year-to-date loss, leaving analysts and investors to ponder the fate of the country’s investment-grade credit rating.
South Africa’s rand, one of the worst-performing emerging markets currencies, is plaguing the country’s economy and equity markets. The sliding currency is also seen as a potential catalyst for sending South Africa’s credit rating into junk territory.
South African stocks have proven particularly vulnerable due to the country’s status as a major producer of precious metals, such as gold, palladium and platinum. Inflation has been rising after a drought in the south pushed up food prices. Additionally, oil prices have been rebounding. The rising inflation will have an effect on consumer sectors. [South Africa ETFs in Focus]
When Standard & Poor’s downgraded Brazil’s sovereign credit rating to junk status in September, market participants immediately began pondering which emerging market would be next to suffer the junk downgrade fate. South Africa was one of the first to be mentioned. On Monday, the rand plunged 9% against the U.S. dollar.
“Policy makers are running out of options on how to ease the crisis. Rising inflation risks stemming from the rand may force the central bank to take more aggressive action in tightening policy at a time when the economy is barely growing. Worsening debt levels and the threat of credit-rating downgrades mean Finance Minister Pravin Gordhan has limited room to veer from his budget targets by boosting spending,” reports Rene Vollgraaf for Bloomberg.
Some market observers believe South Africa’s central bank will be forced to raise interest rates by as much as 50 basis points, which is more than expected, when it meets later this month. Actions by various ratings agencies suggest South Africa’s grasp on an investment-grade credit rating are tenuous at best.
In December, Fitch Ratings pared its rating on South African debt to just one level above junk while S&P reduced its outlook on the country’s bonds to negative from stable.
“Investors have increased bets the central bank will raise the repurchase rate by more than 25 basis points on Jan. 28 to protect the credibility of its 3 percent to 6 percent inflation target band. Consumer prices rose 4.8 percent in November from a year ago,” according to Bloomberg.
iShares MSCI South Africa ETF
