SA rues Gord­han fac­tor

Lesotho Times - - Business -

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.

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