SA markets reel after budget

The rand and government bonds suffered a second day of heavy losses yesterday, pricing in a greater likelihood of credit rating downgrades in the wake of a bleak mid-term budget speech by Finance Minister Malusi Gigaba.

The yield on SA’s benchmark government bond, due in 2026, jumped 31.5 basis points to 9.445%, reflecting weaker bond prices.

“The markets are reacting to concerns about what happens to South Africa’s ratings. Downgrades seem more likely than not,” said Halen Bothma at ETM Analytics.

Gigaba raised Treasury’s estimate for this year’s budget deficit in the 2017/18 fiscal year to 4.3% of GDP, which would be the highest deficit since 2009.

He also halved this year’s economic growth forecast and warned that sovereign debt levels would rise steeply in coming years. Ratings agencies S&P Global and Moody’s are scheduled to review SA’s ratings in November.

Both have SA’s local-currency rating one notch about sub-investment grade, or “junk” status. Should they downgrade the local-currency rating, investors could be forced into selling up to $12 billion of SA bonds.

Fitch, which already has SA’s foreign-currency and local-currency debt in junk territory, said Gigaba’s budget speech signals a policy shift by the Treasury away from commitments to cut down deficits and debt and contains no plans to limit the damage to the economy.

S&P Global said the direction of SA politics will probably trump near-term macro-economic performance, particularly for the country’s still-investment grade local currency credit rating.

Frank Gill, of S&P EMEA, said the firm had expected SA to revise down its GDP growth forecasts. “The committee will take the view that political and institutional developments matter the most in determining SA’s prospects. –