South African government bonds weaker after S&P downgrade

JOHANNESBURG South African government bonds weakened yesterday after S&P Global Ratings on Friday downgraded the country’s local currency debt to sub-investment grade, while foreign currency debt was pushed deeper into “junk” territory.

The rand ZAR=D3 recovered some of its lost ground after tumbling 2 percent on Friday following S&P’s announcement, with traders saying Moody’s decision to only place South Africa on review for downgrade had brought some relief to the currency.

The yield for the benchmark government bond ZAR186= rose 3.5 basis points to 9.37 percent as of 0852 GMT, after falling as much as 11 basis points earlier. However, the currency was trading at 13.9300 per dollar, 1.5 percent firmer than its New York close on Friday.

“The market is finding some relief in the fact that Moody’s has chosen to give us basically till February before they change our rating, if they do change our rating,” said Shaun Murison, currency strategist at IG Markets.

Moody’s rates South Africa’s foreign and local currency debt on their lowest investment grade rung of Baa3.

The agency said the review will allow it to assess the South African authorities’ willingness and ability to respond to the rising pressures through growth-supportive fiscal adjustments that raise revenues and contain expenditures. “The review period may not conclude until the size and the composition of the 2018 budget is known next February,” Moody’s senior analyst for South Africa, Zuzana Brixiova, said in a statement. The National Treasury said on Saturday it would outline “decisive” policy to strengthen South Africa’s fiscal framework in the annual budget next year.

Both S&P and Moody’s cited deterioration in South Africa’s economic growth prospects and public finances.

If nothing changes “the country will be downgraded to ”junk“by all ratings agencies and the WGBI dream will be no more, at least for many a year,” said Standard Bank chief trader Warrick Butler in a note, referring to Citi’s World Government Bond Index (WGBI).-