Rand and local bonds reel from medium-term budget fallout
Concern has been revived that that SA could be stripped of its investment-grade status by Moody's
The rand slipped further on Thursday morning while government borrowing rates surged to their highest levels in about year, signalling market worries about the health of the country's finances.
The upward revision in the the projected government budget deficit and associated deterioration in the government debt-to-GDP ratio has revived concerns that that SA could be stripped of its investment-grade status.
Moody's Investors Service is the only major ratings agency that still rates the country's debt at investment grade. S&P Global Ratings and Fitch have already pulled the trigger in this regard.
Presenting his first medium-term budget policy statement, new finance minister Tito Mboweni also trimmed the economic growth forecast for 2018 to 0.70%, from 1.5% that the Treasury predicted in February.
“I think the market had fully priced in a good [budget statement] and 0% chance of Moody’s moving on the ratings watch. This has now changed and the market needs to move that sovereign rating outlook to a 50% probability at least,” said Warrick Butler, a trader at Standard Bank.
The weak external backdrop did not help the situation, with global equity markets in particular coming under intense selling pressure.
The rand and local bonds are part of emerging-markets, which tend to suffer more during bouts of risk-off trade because they are perceived to risky.
Foreign investors hold the biggest share of local bonds at about 40%, putting the country at risk of bond outflows, when sentiment sours.
At 9.45am the rand was at R14.5594 to the dollar from R14.5563, at R16.6010 to the euro from R16.5812 and at R18.7908 to the pound from R18.7453. The euro was at $1.1443 from $1.1471.
The yield on the benchmark R186 bond was at 9.43%, its lowest level since November 2017, from 9.31% on Tuesday.