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Rand on back foot after S&P downgrade

Oct 15 2012 09:21

Johannesburg - The rand dipped against the dollar on Monday and is expected to remain on a weaker footing after a Standard and Poor’s ratings downgrade that caught the government by surprise.

The rand was trading at R8.7586 to the dollar at 06:58 GMT, 0.4% weaker than its close in New York on Friday.

Standard and Poor’s cut South Africa’s local and foreign currency sovereign ratings one notch to BBB with a negative outlook late on Friday, saying strikes and social tension could reduce fiscal flexibility and hurt growth.

Finance minister Pravin Gordhan said on Monday that the action was “a surprise” coming just weeks before the government releases a medium-term budget policy statement (MTBPS) meant to outline its spending plans for the next two years.

He told a local radio station that Fitch would not make a move until January, waiting for the outcome of an ANC internal leadership conference that President Jacob Zuma is favourite to win despite major internal party opposition.

“Yes, it was a surprise,” Gordhan said.

“Fitch, on the other hand, assured us when we met them that they will follow their normal timeline, which is they will visit South Africa in November, they will wait for the MTBPS, they will wait for the ANC conference to be completed and then they will make their judgment call.”

Analysts said the rand, which tumbled to a three-and-a-half year low of R8.995 a week ago, stopping just shy of the psychological level of R9 to the dollar, is likely to remain under pressure.

“We initially have seen a massive selloff on the rand. That poses upside risks to R9 again,” said Brigid Taylor, head of institutional sales at Nedbank.

“With the continued negative outlook it does pose risks that Fitch will follow but Moody’s might do the same to stay in line with the rest of the rating agencies.”

Government bonds were also weaker on Monday, with the yield on the 2015 paper up 10 basis points at 5.47%, and that on the 2026 instrument gaining 14 basis points to 7.815%.

bonds  |  rand  |  dollar  |  markets



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