Rand Volatility Tops Global Peers as South Africa Risks Mount

(Bloomberg) -- South Africa’s rand is back on its perch as the world’s most volatile currency as investors price in the risk of a credit-rating downgrade while awaiting details of the government’s rescue plan for the state-owned electricity company.

The currency fell for a second day against the dollar on Thursday to levels last seen in early January, and bond yields rose to their highest this year after President Cyril Ramaphosa said little to reassure investors about a turnaround plan for Eskom Holdings SOC Ltd. The rand’s three-month implied volatility climbed for a ninth day, overtaking the Turkish lira, as traders anticipate wider price swings in the run-up to elections in May.

Eskom cut electricity supplies for a fifth day on Thursday, and warned its power generation system remains “vulnerable.” Ramaphosa, who had promised to outline plans to address challenges at Eskom on Thursday, instead used his speech to reassure labor unions the utility wouldn’t be privatized. The blackouts are “having a devastating impact on our economy and on the ordinary lives of people,” the president said in comments broadcast on eNCA earlier.

Moody’s Investors Service has flagged the company’s woes as credit-negative, with the focus now turning to next week’s budget for details on the Eskom strategy.

“We think there is more scope for a higher risk premium to be priced in the currency,” said Kiran Kowshik, a London-based emerging-market currency strategist at UniCredit Bank AG. “An increased risk of a rating downgrade should place the currency under pressure given that there is a very large foreign investors’ exposure in the local bond market.”

Rand Volatility Tops Global Peers as South Africa Risks Mount

Unicredit recommends buying dollar-rand via two-month forwards, targeting a move to 14.75 rand per dollar, with a stop placed below 13.50.

The rand weakened 1.3 percent to 14.2508 per dollar by 6 p.m. in Johannesburg, adding to Wednesday’s 2.2 percent slump. Yields on rand-bonds due December 2026 climbed three basis points to 8.94 percent, the highest on a closing basis since Dec. 27.

The currency’s three-month implied volatility rose to 17.67 percent, the highest of about 34 currencies tracked by Bloomberg. The rand is down 6.9 percent in February, the worst performance among emerging-market peers.

In addition to Eskom, South African assets face a number of risks in coming months. These include the February budget, the parliamentary debate regarding constitutional changes to allow land to be expropriated without compensation, as well as the national election in May. Moody’s, the only major credit-rating company that still grades South Africa at investment level, is reviewing its rating next month.

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