Cape Town - The rand’s slump to a five-year low is souring investor confidence toward South Africa, complicating Finance Minister Pravin Gordhan’s efforts to cut the fiscal deficit as government borrowing costs rise.

The rand weakened past the 11 per dollar mark yesterday for the first time since October 2008, about a month after Lehman Brothers Holdings Inc. collapsed.

Yields on the nation’s 10-year bonds have jumped 32 basis points this year, the most among 21 emerging-market nations monitored by Bloomberg.

One-year interest-rate swaps, used to lock in borrowing costs over the period, climbed to the highest since July 2011.

While Gordhan, 64, is maintaining spending limits and curbing wage growth, rising yields together with South Africa’s slowest economic expansion since the 2009 recession is limiting his ability to curb borrowing.

Bond yields typically rise as the rand weakens because inflation risks build, boosting prospects for an interest-rate increase, which may stifle the recovery.

“The whiff of a rate hike is in the air now,” Nicholas Spiro, managing director at Spiro Sovereign Strategy, said by phone from London yesterday.

“That’s the last thing the South African economy needs. It’s a terribly, terribly difficult situation.”


EM Selloff


The rand has weakened 23 percent since the beginning of 2013, the worst performer among 16 major currencies monitored by Bloomberg.

The rand tumbled with emerging-market currencies from the Turkish lira to Argentina’s peso yesterday, falling as much as 1.6 percent to 11.0496 per dollar. It traded little-changed at 10.9946 by 10:26 a.m. in Johannesburg today.

One-year interest rates swaps rose two basis points to 5.85 percent after jumping as much as 10 basis points yesterday.

South Africa’s budget shortfall is estimated to reach 4.2 percent of gross domestic product in the year through March, unchanged from the previous fiscal year, Gordhan said when he presented his mid-term budget in October.

A Bloomberg customised gauge tracking 20 emerging-market currencies fell 0.3 percent yesterday to 90.16, the lowest level on a closing basis since April 2009.

The index fell 9.3 percent over the past 12 months, the biggest annual decline since the period ending in January 2009.

The government will pay more for borrowing because yields are higher, Asher Lipson, a fixed-income strategist at Standard Bank Group Ltd., said by phone from Johannesburg yesterday.

“That certainly can cause problems down the line.”

Moody’s Investors Service cut South Africa’s credit rating in September 2012 to Baa1, the third-lowest investment grade, while Standard & Poor’s and Fitch Ratings followed by cutting a further step.

Moody’s and S&P hold a negative outlook on South African debt.


Labor Strife


South Africa relies on investment in its stocks and bonds to help finance the gap on its current account, which widened to 6.8 percent of GDP in the third quarter.

Foreigners have sold a net 5.32 billion rand ($482 million) of South African debt this year, after five years of inflows, as the Federal Reserve tapers bond purchases that fuelled demand for emerging-market assets.

The economy probably grew 1.9 percent last year, held back by labor disputes and weak demand for exports, the World Bank said January 15.

It predicts growth in the largest platinum producer and sixth-largest gold miner will accelerate to 2.7 percent this year, compared with growth of 6.4 percent for the rest of sub-Saharan Africa.

Members of the Association of Mineworkers and Construction Union at Anglo American Platinum Ltd., Impala Platinum Holdings Ltd. and Lonmin Plc, the three largest producers, started a strike yesterday that’s disrupting operations accounting for about 70 percent of global output of the precious metal, South Africa’s top export.


Pincer Trap


“The South African economy is caught in a pincer between labor unrest” and “external headwinds,” Spiro said.

“That’s extremely worrying because exports are crucial right now” if growth is to recover, he said.

The inflation rate rose for the first time in four months in December, increasing to 5.4 percent from 5.3 percent the previous month.

The rate rises 0.2 percentage point for every 1 percent depreciation in the rand, according to the South African Reserve Bank’s model.

The central bank, which aims to keep inflation between 3 percent and 6 percent, has left the repurchase rate at a three-decade low of 5 percent since a surprise cut in July 2012 to support growth.

The rand above 11 for a “sustained period of time” boosts the probability the Reserve Bank will have to respond with rate increases, Vivienne Taberer, who helps manage the equivalent of more than $14 billion in fixed-income assets at Investec Asset Management, said by phone from Cape Town yesterday.

Investors are “concerned about the government’s inertia in dealing with the fiscal and current account deficits,” she said.


Rate Bets


Forward-rate agreements starting in four months jumped 20 basis points yesterday to 5.82 percent, or 59 basis points more than the Johannesburg Interbank Agreed Rate.

The contracts are pricing in at least a 50 basis-point rate increase by May.

As recently as January 16, the contracts were pricing in a rate increase in June.

The probability of the rand extending its slide to 11.50 per dollar this quarter is 51 percent, according to Bloomberg calculations based on prices of options to buy and sell the currency.

“There’s nothing magical about 11 rand per dollar, it’s just key from a psychological point of view,” John Cairns, a currency strategist at Rand Merchant Bank, said by phone from Johannesburg yesterday.

“The rand’s decline this year has already hit sentiment very hard.” - Bloomberg News