New Year Kicks Off With Rate Bets Piling Up: South Africa Credit

Investors are increasing bets that South Africa’s central bank will cut interest rates this year as a resurgent rand reduces inflation concern amid slowing economic growth.

Six-month forward-rate agreements, used to speculate on borrowing costs, fell to 4.90 percent on Jan. 2, 22 basis points below the Johannesburg interbank agreed rate, indicating traders are pricing in an almost 50 percent chance of a rate cut by June, Johannesburg-based ETM Analytics said in a Jan. 2 note to clients. The contracts have declined 13 basis points since the start of December, while FRAs for Turkey are unchanged at 6.28 percent in the period.

The rand’s 3.7 percent jump versus the dollar over the past month helped reverse sentiment that in mid-December had investors expressing concern about inflation. The stronger currency is helping to alleviate the effects of rising oil prices, which may allow Reserve Bank Governor Gill Marcus to focus on stimulating the economy.

“I do see scope for a rate cut” in the second half of the year, Mokgatla Madisha, who helps manage the equivalent of $1.3 billion at Argon Asset Management in Cape Town, said by phone yesterday. “The rand has recovered nicely and I don’t think at these levels inflation is going to be a problem.”

Inflation Expectations

The yield difference between five-year fixed-rate bonds and index-linked securities of similar maturity, an indication of investors’ expectation of average inflation over the period, dropped 13 basis points in the past month to 5.92 percentage points, within the central bank’s 3 percent to 6 percent range.

The rand traded at the strongest level in three months against the dollar on Jan. 1, and declined 0.4 percent to 8.6269 as of 3:45 p.m. in Johannesburg. The currency may strengthen to 8.44 per dollar by the end of 2013, according to the median estimate of 28 analysts in a Bloomberg survey.

Inflation, which stayed at 5.6 percent in November, will probably peak at 5.7 percent in the first quarter and average 5 percent in 2014, Marcus said on Nov. 22 when she left the benchmark repurchase rate unchanged at 5 percent.

The economy expanded at its slowest pace since a 2009 recession in the third quarter, and may have been “very low” in the final three months of 2012, Marcus said on Nov. 28. The bank reduced its forecast for growth in 2012 to 2.5 percent, down from 3.5 percent in 2011. Growth this year is expected to average 2.9 percent, it said.

Basket Weightings

New weightings in the inflation basket will probably add to increases in the consumer price index in the first quarter, according to Michael Grobler, a Cape Town-based fixed-income analyst at Afrifocus Securities (Pty) Ltd.

That means inflation-linked bonds may continue to outperform fixed-rate securities in the first half of 2013, Grobler said in an e-mailed response to questions yesterday. Inflation-linked bonds returned 20 percent in 2012, compared with a 16 percent return for fixed-rate debt, according to Bank of America Merrill Lynch indexes.

“I see inflation-linked bonds as expensive on a yield basis, but the lesser of two evils on a two- to three-month investment horizon,” said Grobler, who forecasts a 50-basis-point rate cut in the second half. “Looking ahead I am more positive” on fixed-rate bonds, with forecast returns of 9 percent for the year.

Rate Bets

The Reserve Bank’s Monetary Policy Committee meets on Jan. 25 to review borrowing costs. The MPC will probably leave the repurchase rate unchanged at 5 percent until the third quarter, reducing it to 4.75 percent in the final three months of the year, according to the median estimate of 11 economists in a Bloomberg survey.

“The level of inflation won’t be a sufficient deterrent to cut, with core under control and any breaches of the target likely to be related both to the new index and to short-run and non-core factors,” Peter Attard Montalto, a London-based analyst at Nomura International Plc, said in a note e-mailed to clients yesterday. “We maintain our view of a rate cut for now.”

Demand for the nation’s bonds may spur further currency gains. Foreign investors bought a net 93.4 billion rand ($11 billion) of South African debt in 2012, driving yields on the benchmark 6.75 percent bonds due March 2021 to a record low of 6.34 percent on Dec. 21. They rose six basis points, or 0.06 percentage point, to 6.44 percent yesterday.

“Our rates are still high compared with developed markets,” Argon’s Madisha said. “Emerging markets will continue to attract inflows” from investors in developed nations, benefiting the rand, she said.

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