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Rand Gains on Speculation Gordhan Averted Threat of Rating Cut

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Oct. 24 (Bloomberg) -- South Africa’s rand rose after its biggest drop in more than a week on speculation Finance Minister Pravin Gordhan did 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 reduce perks for politicians and government officials. Moody’s Investors Service and Standard & Poor’s hold a negative outlook on South African debt, signaling a greater chance ratings will be cut.

“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 0.2 percent to 9.7695 per dollar as of 3:18 p.m. in Johannesburg, the second-biggest gain after the Czech koruna out of 24 emerging-market currencies monitored by Bloomberg. Yields on benchmark 7.75 percent bonds due February 2023 were unchanged at 7.35 percent.

Budget Shortfall

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 with downgrades.

The mid-term budget “provides a realistically sober assessment of the challenges South Africa faces,” Carmen Altenkirch, a London-based director at Fitch, said in an e-mailed statement today. “Timely and successful implementation will be required for it to deliver on its goals.”

The budget contained “several positive surprises” though it’s too early to alter opinions on risks that prompted the ratings agency’s negative outlook on South Africa, S&P’s sub-Saharan Africa head Konrad Reuss said yesterday.

The rand maintained its advance after more Americans than forecast filed applications for unemployment benefits last week, adding to evidence the economy isn’t gathering enough momentum for the Federal Reserve to start tapering monetary stimulus.

Jobless claims decreased by 12,000 to 350,000 in the week ended Oct. 19 from a revised 362,000 in the prior period, a Labor Department report showed in Washington. The median forecast of 48 economists surveyed by Bloomberg called for a decrease to 340,000.

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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