South African yields rose and the rand declined for a second day after Standard & Poor’s cut South Africa’s credit rating, citing concern that a wave of strikes in the mining industry is placing pressure on government spending.
Yields on 6.75 percent bonds due 2021 jumped five basis points to 6.79 percent at 3:41 p.m. in Johannesburg. The premium investors demand to hold the debt rather than U.S. Treasuries climbed two basis points to 509. The rand traded 0.9 percent weaker at 8.8054 per dollar, after sliding 0.8 percent on Oct. 12 when the S&P announcement was made.
S&P lowered the rating of the continent’s biggest economy one level to BBB with a negative outlook. Continuing strikes in the mining industry are having a “significant” impact on an economy already struggling to cope with Europe’s debt crisis, President Jacob Zuma said last week. Moody’s Investors Service last month reduced South Africa’s debt rating for the first time since apartheid to Baa1, one level above S&P’s latest rating.
“It is clear that a lack of fiscal room is at the center of the concerns the ratings agencies have,” Quinten Bertenshaw, a Johannesburg-based analyst at ETM Analytics, said in a note e-mailed to clients. “Bonds are under tremendous pressure” and “the vulnerability of the rand is now higher than it has been in the past 12 months,” he added.
Foreign investors sold a net 1.5 billion rand ($171 million) of South African bonds last week, paring purchases this year to 82.4 billion rand. South Africa needs monthly portfolio inflows of about 16 billion rand to sustain its current account deficit, which widened to 6.4 percent of gross domestic product in the second quarter, according to Standard Bank Group Ltd.
The South African Reserve Bank will review its growth forecasts after the S&P downgrade, Deputy Governor Daniel Mminele said yesterday. The central bank cut the nation’s growth forecast to 2.6 percent on Sept. 20 from 2.7 percent and Finance Minister Pravin Gordhan said he will do the same on Oct. 25 when he presents the mid-term budget to Parliament in Cape Town. GDP expanded 3.1 percent last year.
The rand extended its decline as commodity prices fell on concern the global economy is weakening. Emerging nations including China, Brazil and India will grow at 5.8 percent in the half-decade through 2016, almost two percentage points less than the five years before the 2009 slump, according to the International Monetary Fund.
The S&P GSCI Index of raw materials fell 0.4 percent today. Metals and other commodities account for 45 percent of South Africa’s exports, according to government data.
“Concerns over the outlook for global growth increased risk aversion and added to the headwinds the local unit is facing,” John Cairns and Josina Solomons, currency strategists at Rand Merchant Bank in Johannesburg, said in e-mailed comments. “Commodities remain under pressure amid a deteriorating global outlook.”
The rand’s one-month implied volatility against the dollar rose 45 basis points to 17 percent, indicating that options traders see wider swings in the currency in coming weeks.
The cost of insuring the nation’s dollar debt against default using credit default swaps rose three basis points to 160, according to data compiled by Bloomberg. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if the government fails to adhere to its agreements.