Financial market analysts say the decision by Fitch Rating Agency to downgrade the US’s long term foreign currency debt rating from triple-A to AA-plus has had a limited effect on markets and the local currency.
Fitch has indicated that the rating downgrade of the US reflects an expected fiscal deterioration over the next three year, a high debt burden and the erosion in governance.
The move follows a decision by the S&P Global Ratings which downgraded the US in 2011.
Fitch cited tax cuts and new spending initiatives in the US, along with a number of economic shocks, that have pushed up its budget deficit.
Makwe Masilela of Makwe Fund Managers says there was knee jerk reaction on release of the news resulting in the brief weakening of the dollar, however the dollar has since reversed all its earlier losses.
Masilela notes that the rand, along with other emerging markets, remain on the downside due to other local factors.
“When it comes to our yields it’s going to be driven by the expectation of if this downgrade is going to is going to have an influence when it comes to US interest rates and if we think if rate will have to be increased of the back of this. Then unfortunately the yields will continue to go up as a results you’ll expect to see the bond prices going down because of the relationship between the yield and the bond prices.”
A Portfolio Manager at Ninety One, Adam Furlan says the downgrade is unlikely to affect the use of US government debt as a safe haven asset.
Furlan says the current fiscal deterioration that already evident in the US is likely to be inflationary and growth positive for the US economy.
“That means that US interest rates or the cost of capital in the US can remain slightly more elevated for a longer period of time. So, from a growth perspective, I think that is good for emerging market currencies and debt, whilst from a valuation perspective and from an inflation perspective, marginally negative. However, the actual downgrade itself the market is very well of it and it isn’t having any meaningful impact on markets.”
The US debt burden will reach 118% of gross domestic product by 2025, while the federal budget deficit rose by 170% from the same period the year before to reach 1.3 trillion US dollars.
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