Rand, bonds fall as junk rating triggers index exit

Cape Town - The rand and dollar bonds fell after Fitch Ratings became the second company to cut the country’s credit assessment to junk, triggering sales by some investors tracking investment-grade debt indexes. JPMorgan Chase & Co. said it would remove South Africa from gauges tracked by $59bn of funds.

President Jacob Zuma plunged South Africa into a political crisis when he fired Finance Minister Pravin Gordhan in a cabinet purge just after midnight on March 31, prompting a drop in the rand and triggering a downgrade to junk from S&P Global Ratings. The move by Fitch means the country’s foreign-currency debt will now be considered sub-investment grade, and brought the local-currency assessment to the cusp of junk.

“Another downgrade in just one week is a major blow,” said Piotr Matys, an emerging-market strategist at Rabobank in London. “It means that even those foreign investors that are still relatively optimistic about the long-term outlook for South Africa may have to trim their exposure. In the coming weeks, we will probably witness a wave of capital outflows.”

Fitch reduced the foreign-currency and local-currency ratings to BB+, the highest non-investment grade, from BBB-. The outlook is stable. That means another local-currency debt downgrade by S&P would plunge rand bonds into junk territory and see them removed from indexes including Citigroup’s World Government Bond Index.

Debt indexes

JPMorgan will cut South Africa from its investment-grade-only EMBIG indexes, which are tracked by $49bn of funds, on April 28, associate Nelson Chikusa said in an emailed note. It will also exclude the nation’s debt from its GBI-EM GD and ELMI+ investment-grade-only indexes tracked by $10bn of funds on 31 May, he said.

Yields on the government’s benchmark dollar bonds due October 2028 rose eight basis points to 5.17%, widening the premium over US Treasuries by 16 basis points to 296 points. The rand declined as much as 0.6% before paring losses to trade down 0.2% to 13.7886 per dollar by 16:11 in Johannesburg, near its weakest since early January.

The downgrade, especially of South Africa’s local-currency debt, is “substantially negative” for the rand, Razia Khan, head of Africa macro research at Standard Chartered Plc, said in an email. “For markets, this is meaningful, especially since S&P assigned a negative outlook to its own local-currency rating for South Africa, which is currently rated at the lowest rung of investment grade.”

Rabobank’s Matys sees the rand dropping to 14.5 per dollar by the end of the quarter.

“Looking from the mid- and long-term perspective, previous periods of weaker values proved an opportunity to increase exposure to South African assets,” he said. “But I think it’s way too early for that. The sell-off is not over.”

Assets of state-owned companies also declined. The yield on Transnet SOC Ltd.’s $1bn of notes due 2022 rose 19 basis points to 5.28%, the highest since December 6. The rate on Eskom’s 2021 dollar debt increased 35 basis points to 5.84%.

South Africa’s benchmark stock index dropped 0.5%.