Rand slumps to 3-month low

Published Jun 13, 2014

Share

Cape Town - The rand slumped to its weakest level against the dollar in almost three months after Fitch Ratings revised South Africa’s government-debt outlook to negative from stable.

The currency depreciated as much as 1.3 percent to 10.8070 per dollar, the weakest intraday level since March 25.

It traded 0.8 percent down at 10.7515 per dollar by 4:21 p.m. in Johannesburg, the worst performance among 16 major currencies tracked by Bloomberg.

The rand has lost 1.6 percent this week, its third consecutive five-day decline.

Increasing strikes, higher wage demand and electricity constraints are curbing economic growth, while the weaker rand has not yet boosted exports, Fitch said in a statement.

It retained South Africa’s rating at BBB, on par with Russia, Brazil and Colombia.

Standard & Poor’s will announce the result of its debt rating review tonight.

“South African bonds and the rand have opened on the back foot following the announcement by Fitch,” Asher Lipson, a fixed-income strategist at Standard Bank in Johannesburg, said in a e-mailed note.

A resolution to a 20-week strike in the platinum sector could underpin the rand while investors “await this evening’s announcement from S&P,” he said.

The yield on South Africa’s bonds due in December 2026 rose five basis points, or 0.05 percentage point, to 8.42 percent, bringing the advance this week to 20 basis points.

South Africa’s economy, the largest on the continent after Nigeria, faces the prospect of a recession after the strike over pay shut the world’s biggest platinum mines.

A labour union representing workers on industrial action yesterday accepted a proposal to break the deadlock and is canvassing its members, raising expectations of a resumption in operations.

 

Growth Forecast

 

Fitch downgraded the country’s gross domestic product growth forecasts to 1.7 percent in 2014 from a previous estimate of 2.8 percent, and 3 percent in 2015 from 3.5 percent.

“The market has underestimated the risk of a downgrade and therefore it is worth being cautious ahead of the event,” John Cairns, head of foreign-exchange strategy at Rand Merchant Bank in Johannesburg, said in a note.

“The ratings issue will probably outweigh the strike news so the risks remain for rand weakness.”

The government acknowledges South Africa’s growth challenges and remains committed to reducing its fiscal deficit and keeping debt within manageable levels, the Treasury said in a statement responding to Fitch’s outlook change.

“Necessary adjustments” will be made to ensure the government meets its fiscal targets, the Treasury said.

The cost of insuring South Africa’s dollar debt against default for five years using credit default swaps climbed two basis points yesterday to 179. - Bloomberg News

Related Topics: