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Rand Sinks as Fitch Cut Extends Worst Emerging-Market Retreat

Jan. 11 (Bloomberg) -- The rand slid for a fifth day and bond yields rose after Fitch Ratings cut South Africa’s credit rating because of slowing economic growth, a widening budget deficit and rising unemployment.

The currency declined as much as 0.7 percent to 8.7128 per dollar, the weakest level since Dec. 6, and traded 0.6 percent lower at 8.6991 per dollar by 3:49 p.m. in Johannesburg. The rand has slipped 1.6 percent this week, the worst performance of 25 emerging-market currencies tracked by Bloomberg. Yields on benchmark 10.5 percent bonds due December 2026 jumped four basis points to 7.14 percent after falling 27 basis points in the previous four sessions.

Fitch reduced South Africa by one level to BBB, the second-lowest investment-grade ranking and on par with Brazil, Russia and Mexico, following cuts by Standard & Poor’s and Moody’s Investors Service last year. The deterioration of the economy and budget deficit has exacerbated social tensions in the nation, which has seen farm worker protests this week and Harmony Gold Mining Ltd. consider closing its biggest mine on illegal strikes and violence.

“The implications of this downgrade are likely to be visible mostly in the short term and mainly through the weakening of the rand,” Bartosz Pawlowski, the London-based head of emerging-markets strategy at BNP Paribas SA, and colleagues said in a note e-mailed to clients today. South African bonds “have rallied this week and the downgrade could prompt some profit-taking on such positions,” they said.

Yields on South Africa’s $1 billion of 8.875 percent bonds due May 2022 rose six basis points to 3.11 percent. The yield reached a record low of 2.89 percent on Dec. 12. The cost of insuring against non-payment of the debt for five years using credit-default swaps was unchanged at 141 basis points.

Fitch said its rating outlook was stable. “South Africa’s investment grade rating is underpinned by a generally sound banking system, a deep local bond market” and “a floating exchange rate and inflation-targeting regime that is an effective shock absorber,” the company said in its statement.

To contact the reporters on this story: Stephen Gunnion in Johannesburg at sgunnion@bloomberg.net

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

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