Rand Falls With Bonds as Budget Clouds S. Africa Rating Path

(Bloomberg) -- The rand extended its decline Thursday and bond yields climbed to the highest since November as the government’s latest debt projections increased the probability of a credit-rating downgrade that would move South Africa’s local-currency debt into junk status.

In his mid-term budget statement to lawmakers in Cape Town, Finance Minister Tito Mboweni said government debt will peak two years later at a higher level than previously forecast. The fiscal gap will widen further and state revenue will continue to undershoot, he said.

The news is likely to weigh on rating companies including Moody’s Investors Service, which delayed reviewing the country’s debt rating earlier this month. Moody’s is the only one of the three major rating firms to assess South Africa’s debt at investment level. A move lower would spark forced selling of bonds by investors who track investment-grade debt indexes including Citigroup Inc.’s World Government Bond Index.

Rand Falls With Bonds as Budget Clouds S. Africa Rating Path

“I was clearly too optimistic that Mboweni would announce enough fiscal tightening to keep the ratings agencies at bay,” said Win Thin, global currency strategist at Brown Brothers Harriman and Co. “I think risks of downgrades have gone up significantly.”

Foreign investors own 38 percent of South Africa’s 1.97 trillion rand ($136 billion) of local-currency bonds, making the country vulnerable to capital flight. Outflows could reach $5 billion should the country lose its membership of the WGBI, according to Bank of America Merill Lynch.

“I don’t think this budget does S.A. Inc. any favors,” said Halen Bothma, an economist at ETM Analytics in Johannesburg. “It doesn’t instill confidence in the market about the South African government’s ability to tackle its fiscal imbalances. We are leaning towards a higher probability of a downgrade.’

The rand declined as much as 0.5 percent as of 8:36 a.m. in Johannesburg, after falling 2.1 percent the previous day. Benchmark 2026 government bonds retreated, driving the yield up seven basis points to 9.38 percent on Thursday, the highest since November.

“South Africa remains stuck in a low-growth, high-debt environment and it is difficult to get euphoric about the outlook for the rand,” said Bernd Berg, a foreign-exchange strategist at Woodman Asset Management AG in Zug, Switzerland. “With little positive domestic drivers and a challenging external environment, it is hard to see the rand outperform its emerging-market peers in the short run.”

South Africa’s benchmark stock index closed 0.6 percent lower.

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