Rand Gains as Yields Fall to Five-Month Low on Gordhan’s Budget

South Africa’s rand gained and bond yields fell to the lowest in almost five months on speculation Finance Minister Pravin Gordhan had done enough in his mid-term budget to avert the immediate threat of a credit downgrade.

The ruling African National Congress is assured of about 60 percent support in next year’s elections and doesn’t have to increase spending to win votes, Gordhan said in an interview yesterday after presenting a plan to cut perks for politicians and government officials. Moody’s Investors Service and Standard & Poor’s hold a negative outlook on South African debt, indicating a greater chance ratings will be cut than raised.

“From a rand perspective, the fact that the statement reduced the probability of a ratings downgrade through tight expenditure controls is certainly a positive,” Theuns de Wet, head of global markets research at Rand Merchant Bank in Johannesburg, said in an e-mail. The mid-term budget “was interpreted as quite market-friendly,” he said.

The rand appreciated 0.3 percent to 9.7692 per dollar as of 10:45 a.m. in Johannesburg. Yields on benchmark 10.5 percent bonds due December 2026 dropped three basis points, or 0.03 percentage point, to 7.68 percent, the lowest on a closing basis since June 5.

South Africa’s budget shortfall is estimated to reach 4.2 percent of gross domestic product in the year through March, unchanged from last year, Gordhan said. The Treasury restated deficit figures, in line with international reporting standards, to include extraordinary receipts, such as profit on bond sales and foreign-currency transactions.

The deficit and debt were “sustainable,” Gordhan said. The budget gap is forecast to narrow to 4.1 percent, 3.8 percent and 3 percent respectively in the next three fiscal years.

Moody’s cut South Africa’s credit rating in September last year to Baa1, the third-lowest investment-grade level, while S&P and Fitch Ratings followed by cutting a further step.

To contact the reporter on this story: Robert Brand in Cape Town at rbrand9@bloomberg.net

To contact the editor responsible for this story: Vernon Wessels at vwessels@bloomberg.net

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