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Rand slumps as Futuregrowth suspends loans to state firms

Aug 31 2016 16:44
Xola Potelwa

Johannesburg - The rand dropped to the weakest level in more than seven weeks and South African bonds fell after the country’s biggest private fixed-income money manager said it will stop lending money to six of the largest state-run companies.

The South African currency fell as much as 1.4% against the dollar to the lowest since July 8 on a closing basis and was the worst performer among 31 major and emerging market currencies tracked by Bloomberg in August. By 15:11, it was 0.9% weaker at 14.6300, declining for ninth day, the longest losing streak since May 2013. The yield on state power producer Eskom’s $1.25bn of bonds maturing in 2025 jumped 33 basis points to 7.2%, the most in more than six months.

Futuregrowth Asset Management, with about R170bn ($11.7bn) in assets, shelved plans to lend more than R1.8bn to three state companies on Tuesday, chief investment officer Andrew Canter told Bloomberg. Futuregrowth will only resume loans once proper governance and oversight are restored at the companies, Canter said.

“This story just ups the ante in what is becoming a high stakes game of chance,” said Warrick Butler, head of emerging market spot trading at Standard Bank in Johannesburg. “Markets are attuned to any story that may have negative consequences for the country,” and concerned about the possible increase in cost of funding for the government. Futuregrowth’s step could “push the decision makers closer to a resolution in a quicker period,” he said.

The companies affected by the decision are Eskom, Transnet, South African National Roads Agency, the Land Bank of South Africa, the Industrial Development Corp. of South Africa and the Development Bank of Southern Africa. The decision won’t immediately affect lending to the government and municipalities.

The rand has lost 7.2% since a police special investigations unit requested Finance Minster Pravin Gordhan report to their offices over a probe into the tax authority, which he led between 1999 to 2009. Gordhan who refused, is at odds with state-owned companies from South African Airways to Eskom, amid speculation the investigation by the Hawks is evidence of a deepening rift between him and President Jacob Zuma.

Government bonds erased earlier gains, with the yield on the benchmark December 2026 yield rising three basis points to 9.01%. The yield has climbed 38 basis points in August, the first monthly increase since May.

Five-year credit default swaps rose for the first time in three days, climbing 6 basis point to 250 points. Johannesburg’s benchmark banking stocks index reversed its gains after news of Futuregrowth’s decision, falling 1.4% by 15:52.

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