Market Commentary




1Q20 Money Market Commentary 1Q20

By Bongani Ngwanya – Portfolio Manager

At midnight on the 26th March 2020, South Africa (SA) entered an unprecedented 21-day national lockdown to try and contain the spread of the deadly SARS-CoV-2 (‘COVID-19’) virus. The next day, Moody’s downgraded SA’s sovereign debt rating to Ba1 from Baa3 and maintained the sovereign’s negative outlook. This means that all three of the world’s most prestigious credit rating agencies deem SA’s sovereign debt as sub-investment grade or junk. The downgrade came as no surprise and had been priced and expected by the market. The retention of the negative outlook however came as a surprise to most analysts and means we are at risk of another downgrade in the next 12 to 18 months.

Moody’s reasons for throwing in the towel are SA’s structurally weak growth and a myriad fiscal challenges. The negative outlook means the agency will downgrade us further if our growth remains weak, the Debt-to-Gross Domestic Product (‘GDP’) ratio trajectory worsens and structural reforms are not implemented. Moody also cited risks that SA’s debt will become less affordable and SA may have less access to funding in the near future. The COVID-19 pandemic has forced a sharp decline in productivity and a global economic recession. SA was already in an economically vulnerable position prior to this crisis having experienced years of weak business confidence, low private sector investment, Eskom’s unreliable electricity supply, as well as structural labour market issues continuing to constrain economic growth. Economists expect the SA economy to experience a substantial contraction in 2020, with consensus real GDP estimates ranging anywhere between -2% and -9% for the year. As a consequence, the risks of a further sovereign downgrade remain.

The South African Reserve Bank (SARB) cut the repo rate by 200 bps to 4.25%, pleasantly exceeding all expectations. The SARB was  not alone with most central banks across the globe substantially reducing rates and introducing additional quantitative easing measures to provide more liquidity to volatile financial markets. The United States (US) went a step further with the Senate passing a 2 trillion US dollar (‘US$’) stimulus package to support their economy. The substantial reduction in the SA rates will go a long way to provide some relief to households and companies in these uncertain and challenging times.

The SA Rand (‘Rand’) depreciated almost 14% against the US$ in March after having fallen 4.2% in February. The currency is likely to remain under pressure with SA being expelled from the World Government Bond Index (‘WGBI’) at the end of April following Moody’s downgrade of SA’s sovereign debt rating to sub-investment grade.

On the performance front for the quarter, the Fund returned 1.79%, outperforming the benchmark, Alexander Forbes Short-term Fixed Interest Composite Index (‘STEFI’), by 11 basis points. We are actively looking for longer dated maturities (6 – 12 months).