While commodity prices have recovered to some extent, many commodity exporters are reported to be finding commodity price levels still insufficient and government debt levels have been rising, particularly in sub-Saharan countries where this has increased uncertainty and so negatively impacted investment. South Africa suffered from a contraction in investment last year, and government gross debt has escalated from 22% of GDP in 2008/09 to 45.7% of GDP in 2016/17. Uncertainty has risen too on the political and economic policy front with SA currently seeing its key credit ratings split between investment grade (IG) and sub-investment grade (SG). Moody’s and S&P have SA local currency (LC) long-term sovereign debt (LSD) on investment grade, while Fitch has it on SG. SA’s foreign currency (FC) LSD is IG from only Moody’s, while Fitch and S&P have it on SG. This three/three split will likely persist after Moody’s country review of SA, as the agency is expected to move its LC and FC LSD ratings down by only one notch (still IG). SA bonds would then not fall out of the WGBI, with likely little further impact on the rand from this source this year. However, with country reviews from Fitch and S&P twice a year at least, and the possibility of ratings changes between scheduled reviews, the possibility of further downgrades cannot be excluded, which has heightened uncertainty. We ascribe a 35% weighting to this down case of further credit rating downgrades (see “Risk update”, 9th May 2017, website address below), and a 35% weighting to the expected case detailed on page one. With the WGBI holding a large amount of SA’s LC (local currency) LSD (long-term sovereign debt) the rand could weaken substantially if this Citibank fund has to sell its South African bonds (LC LSD), given the large size of its holdings. The rand and bond yields were to a significant extent shielded from April’s credit rating downgrades by the strong risk on in financial markets as foreign investors were heavy purchasers of EM debt globally. Looking forward for the rand, much will depend on the global cycle, with the domestic currency at high risk of volatility, and weakness in particular from further credit rating downgrades and/or a risk-off global environment.


Expansionary fiscal policy in the US is still expected to drive growth, while the European recovery continues, with manufacturing activity and trade improvements of 2016 still noted globally, and indications that this persisted into H2.17 (see figure 4). The feed through into investment and imports is expected to persist, strengthening global economic activity. However the slowdown in China and moderation in commodity prices has impacted emerging market growth, with only a modest pick-up expected.  In sub-Saharan Africa a lift in growth is expected as well (see figure 2), with SA’s pick-up in growth more modest. Commodity prices are generally expected to rise this year and next, but only modestly, and not reaching the heights of 2011 (see figure 4).