Rand starts week on front foot after Moody’s spares junk blushes

Moody’s kept the nation’s foreign- and local-currency readings at Baa3, one step above speculative grade. South Africa is already rated junk by S&P Global Ratings and Fitch Ratings, both of which shifted to non-investment grade in 2017.

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If Moody’s does cut, South Africa will be excluded for the FTSE World Government Bond Index. That would trigger outflows of as much as $15bn from the rand-bond market, according to Bank of New York Mellon, at a time when the nation needs portfolio investment to finance its current-account deficit, one of the largest among major emerging markets.

A downgrade would also raise borrowing costs and make it tougher for the government to balance the budget.

Bank of America expects a downgrade after a budget statement in February, though it says outflows from funds tracking the WGBI may total just $1.5bn.

South Africa’s Finance Minister Tito Mboweni responded to the Moody’s announcement by saying the country needed tough reforms to fix its financial problems and debt-laden state companies such as Eskom.

“It is now or never,” said Mboweni. “Government, labor, business and civil society, we need each other more than ever before.”

Eskom debt

The country is spending R138bn ($9.2bn) to bail out Eskom, the power utility that is saddled with R450bn of debt. Regular blackouts caused economic output to contract the most in a decade in the first quarter and prompted the Treasury to slash its growth forecast for this year to 0.5%.

“South Africa has been a car crash in slow motion,” Cristian Maggio, London-based head of emerging-market strategy at TD Securities, said ahead of the market open. “We’re still at a point where that car has not hit that wall, but you can definitely see that’s where they’re going.”

Still, Moody’s decision to change South Africa’s outlook but not its rating was what most participants in a Bloomberg survey expected.

Against a global backdrop of negative yields, South Africa’s local-currency bonds “stand out for the still-elevated real rates being offered,” said Phoenix Kalen, an analyst at SocGen in London. “Over a short-time horizon, investors may be tempted into holding South African assets for the carry.”