South African Rand Pares Decline After S&P Raises Debt Outlook

The rand pared declines, pulling back from a three-month low against the dollar, after Standard & Poor’s raised the outlook on South Africa’s debt while cutting its credit rating.

The currency weakened 0.1 percent to 10.6817 per dollar by 6:52 p.m. in Johannesburg after slumping as much as 1.3 percent earlier to the weakest intraday level since March 24. The rand has lost 1 percent this week, its third consecutive five-day decline. Yields on government bonds due December 2026 rallied, trading three basis points, or 0.03 percentage point, higher at 8.40 percent after rising as much as eight basis points earlier.

S&P cut its foreign-currency rating to BBB-, the lowest investment-grade level and on par with Russia and Brazil, from BBB. It revised its outlook on the nation’s debt to stable, from negative. Earlier, Fitch Ratings lowered its outlook to negative while retaining its BBB rating, citing poor growth prospects.

“Market reaction is blunted by the fact that a risk of a downgrade had largely been priced in,” Razia Khan, London-based regional head of research for Africa at Standard Chartered Bank Plc, said in an e-mailed note. “Some had even spoken of the likelihood of a two-notch downgrade from S&P. From this perspective, the assigning of a stable outlook to South Africa’s rating by S&P is positive news, relatively speaking.”

Increasing strikes, higher wage demand and electricity constraints are curbing economic growth, while the weaker rand has not yet boosted exports, Fitch said in a statement.

‘Slippery Slope’

South Africa’s economy, the largest on the continent after Nigeria, faces the prospect of a recession after the strike over pay shut the world’s biggest platinum mines. A labor union representing workers on industrial action yesterday accepted a proposal to break the deadlock and is canvassing its members, raising expectations of a resumption in operations.

“South Africa is on a very slippery slope right now,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said via e-mail. “Although markets have already priced in further negative rating actions, a bleaker assessment of the country’s creditworthiness is part of a confluence of domestic and external vulnerabilities that are going to keep weighing on sentiment towards South African assets.”

Slow growth may put the government’s fiscal targets beyond reach, while keeping the current-account deficit under pressure, S&P said in an e-mailed statement. Fitch downgraded the country’s gross domestic product growth forecasts to 1.7 percent in 2014 from a previous estimate of 2.8 percent, and 3 percent in 2015 from 3.5 percent.

Reducing Deficit

The government remained committed and able to service its debt and was confident of its ability to access capital markets to raise foreign-currency funding, the National Treasury said in a statement responding to the rating actions.

“The government remains resolute in its commitment to reduce the budget deficit” in line with targets set in February, the Treasury said. “The necessary reforms to unlock the potential of the South African economy to grow at rates that would accelerate the reduction of unemployment, poverty and inequality are set to be implemented with higher vigor and determination.”

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