JOHANNESBURG - The South African rand and government bonds surged on Monday after ratings agency Moody’s kept the country’s last investment-grade credit rating intact to the relief of investors, but many were sceptical how long the rally would last.
Late on Friday, Moody’s kept South Africa’s sovereign debt at Baa3, the lowest rung of investment grade, but revised the outlook to “negative,” citing a deterioration in the economic growth outlook and rising debt.
A negative outlook usually means there is a window of 12-18 months in which a downgrade could be delivered, but Moody’s said a credible budget statement in February would be crucial to maintain the current rating.
A downgrade to “junk” status on the local-currency rating could trigger billions of dollars of outflows, as South Africa’s government bonds would be ejected from the benchmark World Government Bond Index.
At 0945 GMT, the rand traded at 14.7850 versus the U.S. dollar, around 1.7% stronger than its previous close.
South Africa’s dollar-denominated sovereign bonds jumped, with longer-dated issues adding as much as 1.4 cents in the dollar. The yield on the benchmark 2026 rand bond fell 15.5 basis points to 8.42%.
Stocks edged higher, with the Johannesburg Stock Exchange’s Top-40 index up 0.25%.
Traders and fund managers said the gains would probably be short-lived, as it would be hard for Finance Minister Tito Mboweni to present a greatly improved fiscal picture in February.
Warrick Butler, executive for rand and emerging market spot trading at Standard Bank, said the three to four months until the February budget was “a very short period of time to pump the water from the Titanic. This is not in any way a good situation to be in.”
Part of the reason for Monday’s rally was that South Africa escaped with the best of the three possible outcomes from the Moody’s review.
Some traders had bet that the rating would be downgraded, while others thought Moody’s would place South Africa on review, a bleaker assessment than a negative outlook which signals a downgrade could be imminent.
Other reasons for the rally were healthy appetite for high-yielding assets in emerging markets given optimism over the U.S.-China trade war and a steep sell-off in South African assets last week.
The rand saw its largest daily fall in more than a year on Wednesday, after Mboweni’s medium-term budget statement slashed this year’s growth forecast to 0.5% and showed government debt racing to more than 70% of gross domestic product by 2023.
The rand was still around 1% weaker against the dollar on Monday than it had been before the medium-term budget, and benchmark local government debt yields were still some 20 basis points higher.
Trieu Pham, a sovereign debt strategist at ING, said averting a downgrade could rest on Mboweni’s ability to push through more than 150 billion rand ($10.15 billion) of targeted spending cuts, as well as progress rescuing state power utility Eskom from its financial and operational crisis.