• Currency shrugs off worse-than-expected economic growth data
  • Bond yields fall as nation wins reprieve from junk downgrade

The rand surged to its strongest level against the dollar in more than a month and bonds advanced after Fitch Ratings affirmed South Africa’s investment-grade credit rating even as data showed the economy contracted in the first quarter.

The currency advanced a seventh straight day, gaining 1.5 percent to 14.6910 against the dollar at 1:53 p.m. in Johannesburg, the strongest level on a closing basis since May 3 and erasing an earlier 0.5 percent decline. Government bonds rallied, with the yield on benchmark 2026 rand debt falling 6 basis points to 9.04 percent, while yields on South Africa’s $2 billion of Eurobonds due in 2025 dropped 3 basis points to 4.57 percent, the lowest since Oct. 22.

Fitch kept South Africa’s rating at BBB- with a stable outlook, saying the country had made progress toward fixing power constraints and political risk was not out of line with its peers. The decision came five days after S&P Global Ratings also affirmed its investment grade ranking, with a negative outlook. The rating reprieve outweighed data that showed that gross domestic product shrank more than economists’ expectations in the three months through March.

“There’s a lot more value put on the Fitch decision than” the GDP data, said Wichard Cilliers, a trader at Treasuryone Ltd. in Pretoria, who predicts the rand will extend gains to around 14.20 per dollar. “It was so positive, all the bad news from the GDP was just thrown out the window.”

Finance Minister Pravin Gordhan pledged in his February budget to narrow the fiscal deficit to 2.4 percent of gross domestic product by 2019, from 3.9 percent last year, and limit gross debt to 50.5 percent of GDP in three years by reducing spending and raising taxes. His task is complicated by an economy that is set to expand less than 1 percent this year, the slowest pace since a 2009 recession, according to government and central bank estimates.

Fiscal Targets

Achieving fiscal targets “will be difficult given that GDP growth is likely to underperform,” Fitch said. “Pressures to raise expenditure are rising due to increasing disaffection with poor public-service delivery.” The rating company sees South Africa’s economic growth slowing to 0.7 percent this year and 1.5 percent in 2017.

Fitch’s decision to retain its stable outlook means the country has won a reprieve from a downgrade to junk that would force some money managers to sell its stocks and bonds.

“We didn’t expect Fitch to downgrade us, but we expected an outlook change to
negative,” said Johann Els, an economist at Cape Town-based Old Mutual Investment Group. “That is a positive surprise. I can’t see them downgrading in December with a stable outlook now. Things are as bleak as they were, maybe a month or two ago.”

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