Johannesburg - Bond buyers turned their backs on South Africa yesterday when demand fell by a staggering 41 percent at the weekly fixed-rate government bond auction.
Investors bid for R4.54 billion of R2.35bn of securities on offer, compared with bids of R7.675bn at the previous auction on March 15, according to the Reserve Bank.
This was despite a roadshow to the UK and US undertaken by Finance Minister Pravin Gordhan recently to engage with international investors and also to provide updates on the latest economic developments in South Africa, and plans for the medium term.
The rand shed as much as 1 percent against the dollar, with risker emerging markets on the back foot as investors sought safe haven assets in the aftermath of terror attacks in Belgium yesterday morning.
The currency stumbled to a session low of R15.38 to the greenback, before clawing back some ground to be bid at R15.2445 to the dollar by 5pm.
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“The rand will still remain fragile as the political developments continue to unfold,” analysts at Nedbank said.
Political uncertainty has contributed to a slide in the rand this year and could unnerve ratings agencies as they consider whether to downgrade South Africa to “junk” status, a move which would significantly raise the cost of borrowing.
Analysts have already started preparing the country for a soft landing in junk territory, saying it is not a big deal.
Francois Conradie, the head of research at NKC African Economics, told an international risk briefing recently that a big exit of capital and investment as the result of a downgrade was unlikely because it had already been priced into bond yields.
He added yesterday: “Although the effects of a downgrade itself in a mechanical way may be limited, there is still plenty of danger of a hit to the economy from worsening sentiment and risk perceptions, where political factors play an important role.”
Political disputes were a key hindrance to investors’ perception of emerging market credit worthiness, Per Hammarlund, the chief emerging market analyst at SEB in Stockholm, said recently.
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“The rating agencies were roundly criticised for being slow to react during the 2008 crisis, as well as the 2011 euro zone crisis. They are going to be much more trigger happy this time,” Hammarlund said.
Investors fear further political uncertainty could hasten a downgrade, with Fitch and Standard & Poor’s (S&P) already rating the country just one step above junk status.
Moody’s Investors Service has undertaken a review of South Africa, which may result in a downgrade that is one notch above junk.
‘Action needed’
In what Gordhan called a report back of the Treasury’s non-deal roadshow in the UK and US, it emerged that one of either S&P and Fitch was due to put South Africa’s credit rating on review for a downgrade, which was subsequently postponed to June, following the Budget.
He said the country needed to take concrete action in order to avoid a downgrade to sub-investment grade.
South Africa would join fellow Brics members Russia and Brazil in the club of junk status. Others on the list are Greece and Argentina and the Ukraine.
Junk status means South Africa will have to borrow at a higher rate, which will increase debt servicing costs.
Professional investors such as hedge funds, pension funds and asset managers are prevented by policy from investing in junk countries.
BUSINESS REPORT
– Additional reporting by Reuters