Until this week, October was looking like a good month for South Africa’s currency and bonds. Finance Minister Tito Mboweni’s dismal budget statement changed all that.
From being about 4% stronger against the dollar in the month through Monday, the rand has swung to a monthly loss, one of only five emerging-market currencies to decline in October along with India’s rupee, the Chilean and Argentinian pesos, and Turkey’s lira. Benchmark government bond yields hit a five-week low last week. Since then, they’ve climbed 40 basis points to the highest since early May.
South Africa’s debt pile is increasing fast, economic growth is weak and there’s a lack of progress turning around the ailing state-owned electricity company. That raises the risk the country will lose the stable outlook on its last investment-grade rating with Moody’s Investors Service.
A switch to a negative outlook could be the precursor to a downgrade that would increase borrowing costs and trigger massive investment outflows at a time when the country relies on portfolio investment to finance its current-account deficit. Foreign investors sold a net 3 billion rand ($198 million) of South African bonds on Wednesday, the biggest daily outflow in almost two months.
“The bottom line is that South Africa’s fiscus is in dire straits,” Nema Ramkhelawan-Bhana, a Johannesburg-based analyst at Rand Merchant Bank, said in a client note. “The downward revisions to budget forecasts are testament to the country’s economic and fiscal stress – a reality for investors with interests in SA; their pessimism was expressed through the sell-off in the local currency and bond market.”
The rand declined 1.1% to 15.1646 per dollar on Thursday, adding to yesterday’s 2.5% drop. It’s down 0.2% this month. Yields on 2026 government rand bonds climbed 12 basis points to 8.56% after soaring 23 basis points yesterday.
©2019 Bloomberg L.P.
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