SA rues Gordhan factor
JOHANNESBURG — IN A month when a record wave of funds headed to emerging markets, South African bonds managed to lose money for foreign investors.
And things could get much worse, with some analysts predicting the rand will slump as much as 30 percent against the dollar, further undercutting profits for international buyers, as a struggle over control of the country’s purse strings deepens.
Political risks could see the country’s debt downgraded to junk this year, according to Goldman Sachs Group.
Rand-denominated government bonds have lost 2.9 percent during August in dollar terms, the worst performance out of 31 sovereigns monitored by Bloomberg and one of only three to post losses.
Bond yields climbed by the most since December in the past week as the rand tumbled on concern Finance Minister Pravin Gordhan’s job is on the line as his feud with allies of President Jacob Zuma widens.
The slump comes at a time when money managers are reallocating funds to emerging markets at a record pace.
“If Gordhan goes, it’s an indication that the government is happy for us to get downgraded,” said Abax Investments money manager Rashaad Tayob, who predicts yields could rise as much as 200 basis points if Gordhan were replaced by a candidate less trusted by investors.
“A noncredible candidate could bring several years of economic instability to the country and in that type of environment you need very significant risk premiums to be holding South African bonds.”
Emerging-market debt funds received a record $18.7bn in July and $4.2bn in the first half of August, according to EPFR Global.
Jpmorgan Chase & Company expects the inflows to reach $40bn in 2016. Even so, yields on South African benchmark government bonds due December 2026 soared 56 basis points in the past week to 9.08 percent, twice the average yield of local-currency emerging-market debt monitored by Bloomberg indices.
Gordhan staved off a credit downgrade in 2016 by pledging to curb spending and debt at a time when Zuma’s allies in the ANC are calling for a “re-prioritisation” of the budget following setbacks in local government elections.
The finance minister was ordered last week to report to the Hawks, which are investigating alleged irregularities at the South African Revenue Service ( SARS). He refused, saying he had done nothing wrong.
“The underlying issue is what is the political agenda driving this attack on the minister?” Colin Coleman, partner and head of Goldman Sachs in SA, said in an interview with Bloomberg TV on Monday.
“If the minister is arrested or charged, you will see the rand buckle further. It will be very badly taken by the rating agencies and will probably result in SA being downgraded.”
Populist approach Fitch Ratings and S&P Global Ratings affirmed SA’S long-term foreign currency rating at BBB-, the lowest investment grade, in June and said the government must take decisive measures to bolster growth, quell policy uncertainty and end political turmoil to avoid a downgrade.
There was a risk that the ANC could turn to a more populist approach to address rising voter dissatisfaction, Fitch said after the August 3 local government vote.
The likelihood of a downgrade to noninvestment grade by S&P before year-end has increased to 80 percent, from 70 percent in July, according to o Société Générale.
S&P has a negative outlook on SA and is reviewing its assessment in December.cember.
Société Générale lost 2.9 percent shorting thee dollar in favour of the rand since August 19, before the Gordhan investigation nvestigation unexpectedly sent thee rand into a tailspin. spin. The currenrrency was trading aroundund R14.41/$ /$ at about ut 11.50am on n Tuesday.
“Rand-denominated debt would bear the brunt of pain from rating downgrades,” Roxana Hulea and Phoenix Kalen, emerging-market strategists at Société Générale, said in a note.
“In addition to inevitably higher funding costs, a downgrade to noninvestment grade would weigh on SA’S ability to attract capital flows.”
Fiscal discipline If Gordhan was replaced by someone not as committed to fiscal discipline, the rand would probably weaken about 30 percent to R19/$, said Investec economist Annabel Bishop.
In the extreme-case scenario — in which successive credit downgrades push borrowing costs up, leading to a default — the rand could hit R30/$, she said in a note on August 26.
“It is perceptions of the future creditworthiness of a country’s finances that count for the rating agencies, and so it is the current conduct of a country’s government that is used to form judgment on this future creditworthiness,” Bishop said. — Bloomberg
SA Finance Minister Pravin Gordhan.