You are currently viewing our desktop site, do you want to visit our Mobile web app instead?

Rand gains with bonds as SA dodges Moody’s downgrade

But ‘junk’ still looming for the country.
The US dollar was quoted as much as 1.2% lower against its South African peer at R14.86 per greenback in early trade. Image: Moneyweb

South Africa’s rand and bonds rose after the country clung to its last investment-grade credit rating.

The currency gained 1.7% to 14.7853 per dollar by 11:37 am in Johannesburg, the most on a closing basis in more than three weeks, and paring its loss since the end of June to 4.7%. The yield on rand-denominated government bonds fell the most since early 2018 and stocks advanced.

Moody’s Investors Service on Friday held back from downgrading the government’s debt to junk, although it did lower the outlook to negative. This came even after the country released budget forecasts last week that showed its financial situation deteriorating rapidly.

Moody’s kept the nation’s foreign- and local-currency readings at Baa3, one step above speculative grade. South Africa is already rated junk by S&P Global Ratings and Fitch Ratings, both of which shifted to non-investment grade in 2017.

The yield on bonds due December 2026 declined 15 basis points to 8.41% and the FTSE/JSE Africa All Share Index climbed 0.2%, with banking stocks among the biggest contributors to the move. The rand’s one-week implied volatility versus the dollar dropped 288 basis points to 12.9%, indicating that options traders are expecting price swings to moderate.

If Moody’s does cut, South Africa will be excluded for the FTSE World Government Bond Index. That would trigger outflows of as much as $15 billion from the rand-bond market, according to Bank of New York Mellon Corp., at a time when the nation needs portfolio investment to finance its current-account deficit, one of the largest among major emerging markets.

A downgrade would also raise borrowing costs and make it tougher for the government to balance the budget. 

Bank of America Corp. expects a downgrade after a budget statement in February, though it says outflows from funds tracking the WGBI may total just $1.5 billion.

South Africa’s Finance Minister Tito Mboweni responded to the Moody’s announcement by saying the country needed tough reforms to fix its fiscal problems and debt-laden state companies such as Eskom. 

“It is now or never,” he said. “Government, labor, business and civil society, we need each other more than ever before.”

Eskom woes

The country is spending R138 billion to bail out Eskom, the power utility that is saddled with R450 billion of debt. Regular blackouts caused economic output to contract the most in a decade in the first quarter and prompted the Treasury to slash its growth forecast for this year to 0.5%.

“South Africa has been a car crash in slow motion,” Cristian Maggio, London-based head of emerging-market strategy at TD Securities, said ahead of the market open. “We’re still at a point where that car has not hit that wall, but you can definitely see that’s where they’re going.”

Still, Moody’s decision to change South Africa’s outlook but not its rating was what most participants in a Bloomberg survey expected.

Against a global backdrop of negative yields, South Africa’s local-currency bonds “stand out for the still-elevated real rates being offered,” said Phoenix Kalen, an analyst at SocGen in London. “Over a short-time horizon, investors may be tempted into holding South African assets for the carry.”

© 2019 Bloomberg L.P.

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.

COMMENTS   3

You must be signed in to comment.

SIGN IN SIGN UP

MOODYS has lost the plot! Didn’t they watch “the game” on Saturday in Japan?

SA is back on track!!

Now SA govt needs “ACTION” so many times toted in the media. Hence I propose the following team changes:

Pres Ramaphosa to step down, to allow for Siya Kolisi as new president!

Min of Sport, Mthethwa, to resign in favour of Min Rassie Erasmus.

Police Min Bheki Cele to stand down, for new Min Makazole Mapimpi

Cheslin Colbe to take over as Min of Energy, from Gwede Mantashe

Faf de Klerk to take over the reigns as Fin.Min from Tito Mboweni

Health Min Zweli Mkhize to be replaced by Min Damian de Allende.

Transport Min Fikile Mbalula to be brushed aside (pun intended) by new Min Tendai Mtawarira!

Home Affairs’ Aaron Motsoaledi to be ‘kicked out’ (pun intended) and replaced by Min Handre Pollard.

…and so forth 🙂

Yes, but we can keep Gwede Mantashe as a minister, not of mining or even home affairs, but of bedroom affairs. He vehemently denies it now, but he already confessed to his new position as the “under covers” minister of bedroom affairs. He has already paid some bribes in his new position.

End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

Podcasts

NEWSLETTERS WEB APP SHOP PORTFOLIO TOOL TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company: