South African companies are less exposed to currency volatility than those in other emerging markets, such as those in Turkey, due to the country's deep and well-developed rand debt capital market which has limited their need to use foreign currency debt, Moody's Investors Service said in a report today.
Moody's report, "Non-financial corporates — South Africa, Direct credit exposure to currency volatility limited despite macroeconomic implications" is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. This report does not constitute a rating action.
"Currency volatility in emerging markets has been one of the key focus areas for investors this year, particularly in terms of how it affects credit risk for companies" said Dion Bate, a Moody's Vice President -- Senior Analyst. "In South Africa, the rand debt capital market provides good access to rand-based borrowing, reducing companies' need to rely on foreign currency debt funding. The use of foreign currency denominated debt has been driven by offshore expansion, which in most cases is serviced with cash flow generated in the same currency, creating a natural hedge to currency fluctuations".
"A low growth environment and policy uncertainty remain key constraints for South African companies. In addition, rand volatility has broader macroeconomic implications which indirectly complicates the domestic operating environment and investment decisions for South African companies".
The evolution of the rand will be driven by the Government of South Africa's (Baa3 stable) success in implementing policy reforms and by global macroeconomics, in particular US and European Union central bank monetary policy decisions, evolution of trade tensions and broader emerging market dynamics.
While rand movements against the dollar or euro are expected to remain volatile for the next 12 to 18 months, South African companies have adopted a variety of hedging practices that will help to mitigate sudden exchange rate swings which protect their credit quality from rand movements. In the event that the rand is weak for a longer period, hedging provides time for companies to adjust and align their operating models to the weaker rand levels.
Hedging policies which match cash flow and debt obligations in the same currency tend to reduce the effects of currency volatility on leverage ratios, as in the case of Growthpoint Properties Limited (Baa3 stable). For companies with large offshore operational and debt exposures in different currencies, such as MTN Group Limited (Ba1 under review for downgrade), revenue, cash flow and ultimately credit metrics are more volatile.
The current US dollar-rand exchange volatility is having a muted credit impact on South African miners. The operating margins of gold, platinum group metals (PGM) and diamond miners will remain insulated from rand-dollar exchange rate volatility because they have a high level of exposure to local currency costs and their revenue is generated in dollars.
South African companies with a high proportion of foreign currency debt are more exposed to volatile debt servicing obligations, particularly if they are not adequately hedged. In this category are MTN Group and Hyprop Investments Limited (Baa3 negative) - which respectively have around 47% and 74% of their debt in dollars and/or euros.
In contrast, Transnet SOC Limited's (Baa3 stable) policy to swap all of its foreign debt obligations — which make up 22% of its total debt — into rand, eliminates any currency volatility risks.
