South Africa Rand Slumps to Record Low After Moody’s Cut to Junk
South Africa Rand Slumps to Record Low After Moody’s Cut to Junk
South Africa’s rand weakened to a record low, dollar bonds plunged and banking stocks dropped after the country lost its last investment-grade credit rating. Investors anticipate it may slide even deeper into junk as the spread of the coronavirus hammers the economy.
The currency dropped as much as 2.5% to 18.09 per dollar, breaching 18 for the first time. It traded 1.1% down at 17.82 by 12:46 p.m. in Johannesburg, still the worst performance among major emerging-market currencies after the Mexican peso.
Yields on 10-year dollar-denominated bonds climbed 69 basis points to 8.13%, a record, and widening the premium over U.S. Treasuries to 735 points. Yields on 10-year government bonds opened 60 basis points higher, but erased the increase as additional liquidity measures announced by the country’s central bank over the weekend came into play.
An index of South African bank stocks slid as much as 6.1%, extending Friday’s 12% slump. The equity market’s main gauge gained 0.8%, with some exporters and companies with international income benefiting from the currency’s depreciation.
Moody’s Investors Service on Friday cut its assessment of South Africa to sub-investment grade, saying unreliable electricity supply, persistently weak business confidence and investment, and labor market rigidities continue to constrain the economy.
Lowering South Africa’s rating to Ba1, one level below investment grade, Moody’s kept a negative outlook on the government’s debt, which it said “reflects downside risks to economic growth and fiscal metrics.”
That could lead to a rise in the debt burden, increasing borrowing costs and weakening South Africa’s access to funding, it said.
“Perhaps the downgrade is a catalyst for much-needed structural reform,” said Nema Ramkhelawan-Bhana, an analyst at Rand Merchant Bank in Johannesburg, in a note to clients. “The end state remains unclear, especially as South Africa sinks further into the abyss of recession.”
Finance Minister Tito Mboweni said on Sunday evening that he may approach the International Monetary Fund and World Bank for assistance in fighting the coronavirus pandemic.
The downgrade will cause Africa’s most industrialized economy to fall out of the FTSE World Government Bond Indexes, which are tracked by around $3 trillion of funds. South Africa has a 0.45% weighting in the main index. The index will be reweighted at the end of April.
Analysts are divided over how many outflows from passive funds the index exclusion will trigger. Barclays Plc analysts said Monday there could be $6 billion of forced selling, with foreign holdings of South African local-currency government debt falling to 30-32% of the total from 37%. Morgan Stanley forecasts $2-$4 billion of outflows, while Standard Chartered Plc says it could be anything from $4 billion to $10 billion.
Foreign investors have already sold a net 46.8 billion rand ($2.7 billion) of government securities this year.
The cost of insuring South Africa’s dollar debt against non-payment rose to the highest since 2009, with five-year credit default swaps climbing 38 basis points to 438.
©2020 Bloomberg L.P.