SA loses out on bond rally amid Gordhan uncertainty

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 worse, with analysts predicting the rand could 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 deepens.

Political risks could see the country’s debt downgraded to junk this year, according to Goldman Sachs Group.

Rand-denominated government bonds lost 2.9 percent this month 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 was on the line as his feud with allies of President Jacob Zuma widened. 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 down- graded,” said Rashaad Tayob, a money manager at Abax Investments who predicted yields might rise as much as 200 basis points if Gordhan were replaced by a candidate less trusted by investors.

Emerging market debt funds received a record $18.7 billion (R268.9bn) last month and $4.2bn in the first half of this month, according to EPFR Global. JPMorgan Chase expected the inflows to reach $40bn this year.

Even so, yields on South African benchmark government bonds due December 2026 soared 46 basis points in the past week to 8.98 percent, twice the average yield of local currency emerging market debt monitored by Bloomberg.

Gordhan staved off a downgrade this year by pledging to curb spending and debt when Zuma’s allies were calling for a “re-prioritisation” of the budget.

The finance minister was ordered last week to report to the Directorate for Priority Crime Investigations investigating alleged irregularities at the SA Revenue Service.

“The underlying issue

‘If Gordhan goes it’s an indication that the government is happy for us to get downgraded.’

what is the political agenda driving this attack on the minister?” asked Colin Coleman, the head of Goldman Sachs in South Africa. “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 South Africa being downgraded.”

Fitch Ratings and S&P Global Ratings affirmed the country’s long-term foreign currency rating at BBB-, the lowest grade, in June and said the government had to take decisive measures to bolster growth, quell uncertainty and end political turmoil to avoid a downgrade. – Bloomberg