The rand extended its losses, declining the most in more than a week, and yields climbed after South Africa posted its biggest trade deficit in seven months and Moody’s Investors Service cut the nation’s rating.
The rand retreated as much as 1.1 percent, the most since Sept. 20, and traded 0.7 percent weaker at 8.2875 by 3:40 p.m. in Johannesburg, headed for its third weekly decline. Yields on 6.75 percent notes due 2021 climbed six basis points to 6.56 percent.
South Africa’s trade shortfall reached 12.2 billion rand ($1.5 billion) compared with 6.7 billion rand in July, the Pretoria-based South African Revenue Service said in an e-mailed statement today. The median estimate in a Bloomberg survey of seven economists was for a 6.9 billion-rand gap.
“The trade deficit obviously impacts the country from a funding perspective and that’s been one of the concerns of the ratings agencies, worrying about the potential for funding going forward,” Brigid Taylor, the head of institutional flow sales at Johannesburg-based Nedbank Group Ltd., said by phone.
Moody’s retained its negative outlook on the rating given policy “uncertainty” ahead of the December conference of the ruling African National Congress. S&P, which also has a negative outlook on South Africa’s debt, said in a statement that news flow from the country hasn’t been good and risks haven’t eased. The comments outweighed foreign buying of bonds ahead of their inclusion in Citigroup Inc. (C)’s World Government Bond Index on Oct. 1.
“It’s a tussle between the good and the bad, and the market is giving more weight to the Moody’s downgrade than to the possible bond inflows,” Ion de Vleeschauwer, chief dealer at Bidvest Bank Ltd., South African chain of money-changers, said by phone from Johannesburg. “The comments by Moody’s were a bit of a reality check, because they highlighted structural issues that are going to be with us for a while.”
Moody’s cut the country’s sovereign-credit rating one level to Baa1 from A3, citing the government’s inability to deal with economic and political challenges.
“The revision reflects Moody’s view of the South African authorities’ reduced capacity to handle the current political and economic situation and to implement effective strategies that could place the economy on a path to faster and more inclusive growth,” the ratings company said in a statement.
South Africa’s first debt downgrade since apartheid ended in 1994 comes after six weeks of labor unrest that has left at least 46 people dead and shut mines owned by Lonmin Plc, Anglo American Platinum Ltd. and AngloGold Ashanti Ltd.
Foreign investors bought 300 million rand ($36 million) of South African bonds yesterday, the seventh day of net purchases of the nation’s debt, before the addition of the securities to the Citigroup gauge at 5 p.m. Johannesburg time. Foreign buying this year at 76 billion rand is the most on record for any full year, according to data compiled by Bloomberg.
“Inflows related to South Africa’s accession into the WGBI will dominate flows through the week ahead, possibly beginning as early as today,” Quinten Bertenshaw, an analyst at ETM Analytics in Johannesburg, said in a note to clients today. “The flows are expected to be fairly sizable.”
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