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Rand rallies with bonds as SA dodges Moody's downgrade

Nov 04 2019 18:54
Michael G. Wilson, Robert Brand and Colleen Goko, Bloomberg

The rand climbed and government bonds gained the most in 20 months after South Africa clung to its last investment-grade credit rating.

The currency gained 1.7% to R14.7771/$ by 16:43 in Johannesburg, the most on a closing basis in more than three weeks, and paring its loss since the end of June to 4.7%.

The yield on rand-denominated government bonds fell the most since February 2018 and stocks advanced. Moody's Investors Service on Friday held back from downgrading the government's debt to junk, although it did lower the outlook to negative.

This came even after SA released budget forecasts last week that showed its financial situation deteriorating rapidly.

Moody's kept SA's foreign- and local-currency readings at Baa3, one step above speculative grade. South Africa is already rated junk by S&P Global Ratings and Fitch Ratings, both of which shifted to non-investment grade in 2017.

The yield on bonds due December 2026 declined 15 basis points to 8.41% and the rate on benchmark 2028 dollar securities dell 11 basis points to 4.69%. The FTSE/JSE Africa All Share Index climbed 0.5%, with banking stocks among the biggest contributors to the move.

The rand's one-week implied volatility versus the dollar dropped 3.5 percentage points to 12.9%, indicating that options traders are expecting price swings to moderate.

If Moody's does cut, SA will be excluded for the FTSE World Government Bond Index. That would trigger outflows of as much as $15bn from the rand-bond market, according to Bank of New York Mellon Corp., at a time when SA needs portfolio investment to finance its current-account deficit, one of the largest among major emerging markets.

A downgrade would also raise borrowing costs and make it tougher for the government to balance the budget.

Bank of America Corp. expects a downgrade after a budget statement in February, though it says outflows from funds tracking the WGBI may total just $1.5bn.

SA's Finance Minister Tito Mboweni responded to the Moody's announcement by saying the country needed tough reforms to fix its fiscal problems and debt-laden state companies such as Eskom.

"It is now or never," he said. "Government, labour, business and civil society, we need each other more than ever before."

Eskom Woes

SA is spending R138bn ($9.2bn) to bail out Eskom, the power utility that is saddled with R450bn of debt. Regular blackouts caused economic output to contract the most in a decade in the first quarter and prompted the Treasury to slash its growth forecast for this year to 0.5%.

"South Africa has been a car crash in slow motion," Cristian Maggio, London-based head of emerging-market strategy at TD Securities, said ahead of the market open. "We're still at a point where that car has not hit that wall, but you can definitely see that's where they're going."

Still, Moody's decision to change SA's outlook but not its rating was what most participants in a Bloomberg survey expected.

Against a global backdrop of negative yields, SA's local-currency bonds "stand out for the still-elevated real rates being offered," said Phoenix Kalen, an analyst at SocGen in London. "Over a short-time horizon, investors may be tempted into holding SA assets for the carry."

By early evening the rand was trading up 0.46% at R14.77/$.

moody's  |  markets  |  currencies  |  bonds  |  rand
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