South African Assets Tumble as Gloom Pervades Fiscal Outlook

  • Country facing credit downgrade after Zuma fires finance chief
  • Government fails to raise full amount in bond auction

South Africa's Zuma Fires Finance Minister Gordhan

South African bank stocks tumbled and bonds plunged as the rand headed for its biggest weekly slide since 2015 after the firing of Finance Minister Pravin Gordhan raised concerns about the country’s fiscal path and its investment-grade credit rating.

The rand dropped as much as 2.6 percent before paring the decline to trade 0.9 percent weaker at 13.3995 per dollar by 5:15 p.m. in Johannesburg, heading for a seven-week low. Benchmark 10-year government bonds tumbled the most in seven months, sending the yield soaring by 35 basis points to 8.86 percent, and the government failed to raise the full amount at a scheduled bond auction. An index of bank stocks fell 6.1 percent, the most since December 2015.

The rand was one of the top-three emerging-market currencies last year and early 2017, but politics are again casting a cloud over the nation’s assets. Gordhan had fended off a downgrade in South Africa’s rating to junk, and his commitment to curb spending and government debt had endeared him to investors. He clashed with President Jacob Zuma over the affordability of building nuclear power plants and the management of state-owned companies.

“We regard this is as a devastating turn of events for South Africa,” Sean Ashton, chief investment office at Anchor Capital in Johannesburg, said in a note. “The rand has already responded swiftly, but we believe more weakness could follow. Shares of banks, retailers and listed property will come under significant pressure,” as would bonds, he said.

Zuma replaced Gordhan with Home Affairs Minister Malusi Gigaba, the Presidency said in a statement Friday. African National Congress lawmaker Sfiso Buthelezi takes over from Gordhan’s deputy, Mcebisi Jonas.

The currency was heading for a 7.2 percent loss for the week -- the worst such performance since the last time Zuma rocked markets with a finance-minister firing. Back in December 2015, it was Nhlanhla Nene’s ouster that hurt confidence -- an episode that ended with Zuma bringing back the respected Gordhan to office.

One-year interest-rate swaps rose the most since December 2015 and forward-rate agreements climbed as traders priced out any chance of a rate cut in the next year. Yields on the country’s $2 billion of Eurobonds due October 2028 jumped 18 basis points to 5.09 percent, widening the premium over U.S. Treasuries to 267 points. The South African Treasury fell short of its target at an auction of inflation-linked debt Friday, selling only 230 million rand ($17 million) of the 650 million rand of securities offered.

Political tensions in the country may escalate further -- read about that here.

Shares in financial companies and retailers bore the brunt of the selling of Johannesburg stocks as the general retail index dropped 3.9 percent and insurers fell 3.5 percent. The overall benchmark index was down 0.4 percent, supported by rand-hedge stocks that benefit from weakness in the currency. Mining shares rose 1.6 percent.

“If the current situation with the new finance minister continues, interest rates are not going to be cut anymore in South Africa, they’ll probably go up; the long bond will go up and stay up and we will get a credit downgrade -- and all of that is just not good for domestically orientated shares,” said Wayne McCurrie, a money manager at Ashburton Investments.

“Any company that has the majority of their business in South Africa and is reliant on the South African economy will take strain,” he said. “Any company that has big overseas interests, or is in fact an overseas company, their shares will go up on the back of the weak rand.”

‘Buying Opportunity’

Politics aside, the generally positive environment for emerging markets, and synchronous pick-up in global economic growth, argues in favor of South Africa, with its mining assets. Its currency enjoyed a 12.6 percent jump against the dollar last year -- behind only Brazil’s real and Russia’s ruble among emerging markets, according to data compiled by Bloomberg.

“The annoying, frustrating thing from the South Africa perspective is that you don’t want political worries now, because things are trending up, things are picking up,” Moz Afzal, global chief investment officer of EFG Asset Management, said in an interview in Singapore. “South Africa is pretty much in the penalty box” for investors now, he said.

South African assets may present a buying opportunity, if sovereign ratings downgrades or mass cabinet sympathy resignations materialize and lead to further rand weakness, according to Societe Generale SA, which recommended Friday buying government bonds due 2048.

“Despite the fraught political situation in which South Africa currently finds itself, we note that dynamics past the immediate horizon favor out-performance in the country’s assets,” Phoenix Kalen, London-based director of emerging markets strategy at Societe Generale, wrote in a report dated March 31.

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