Rand’s Slump Adds to Nene’s Troubles as Debt-Service Costs Rise

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The rand’s slump to a record-low is adding to the problems facing South African Finance Minister Nhlanhla Nene.

Already contending with sluggish growth, a persistent fiscal deficit and unemployment at 25 percent, he’ll now have to find more money to repay interest on dollar securities at a time when debt-service costs are the government’s fastest-rising expenditure item. That risks undermining Nene’s pledge to cut the fiscal deficit, and bondholders are taking note.

Investors are demanding the biggest premium in more than six years to hold the nation’s dollar securities, according to JPMorgan Chase & Co. indexes. Yields on 10-year Eurobonds have climbed 34 basis points this month to the highest since December, outpaced only by Russia and Turkey among 31 major emerging markets.

“They’ve got to worry about it,” Isaac Matshego, an economist at Nedbank Group Ltd., said by phone from Johannesburg on Thursday. “It could point toward a higher-than-planned budget deficit.”

Fiscal Shortfall

In February, Nene targeted a fiscal shortfall of 3.9 percent of GDP for the year through March 2016, up from 3.6 percent forecast in October. Debt-service costs would consume 10.1 percent of expenditure, compared with 9.6 percent the previous year, he said. Net debt was projected to rise to 42.5 percent of GDP this fiscal year, from 40.8 percent, with foreign-currency debt accounting for less than 10 percent of the total.

Remaining interest payments on dollar debt this fiscal year will be about 640 million rand higher than projected in the February budget, according to Bloomberg’s calculations. At the current rand level, payments would be about 6 billion rand higher over the next 10 years.

No one is in doubt about South Africa’s actual ability to pay back its debt, Peter Worthington, a Johannesburg-based emerging-markets analyst at Barclays Plc’s South African unit, said by phone. Still, investors worry about “countries like us with big external and fiscal deficits that have a large financing requirement just as we’re going into a period where we’re going to see big hikes coming out of the Fed.”

‘Negative Effect’

Yields on South Africa’s $2 billion of bonds due September 2025 climbed 12 basis points last week to 4.84 percent by 4 p.m. in London on August 21, while similar maturity local-currency yields added 4 points to 8.32 percent. The sovereign spread, or average premium of South African yields over U.S. Treasuries, was unchanged at 328, the highest since May 2009.

The rand was 3.7 percent weaker at 13.3257 per dollar by 7:14 a.m. in Johannesburg on Monday after falling to 14.07 earlier, the lowest on record. The rand’s 8.5 percent slump this quarter would support exports, though the potential benefit was being undermined by electricity shortages, the National Treasury said in an e-mailed response to questions on August 21.

“The weakness of the rand against the dollar is broadly in line with the changes in other emerging-market currencies,” the Treasury said in the e-mail. “The knock-on impact of higher prices for imported goods on inflation has so far been relatively low although this remains a risk.”

Any advantage from increased exports will probably be outweighed by rising prices, said Kevin Lings, an economist at Stanlib Asset Management in Johannesburg.

“We’re still going to see much more of the effect,” Lings said by phone on August 21. “The negative effect will increase over the coming year because of the sustained impact.”

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