Cape Town - The rand softened on Monday after President Jacob Zuma survived another attempt to recall him as Goldman Sachs warned that the currency could fall even further if downgrades pushed it outside the Citigroup’s influential World Government Bond Index (WGBI).
The rand fell from Sunday night’s highs of R12.6528 to R12.9726 by 5pm yesterday after Zuma defeated over the weekend another call from the ANC, while stocks closed flat, hampered by the banking sector. Gains made in previous trading were shed as investors bet on strong opposition to Zuma’s leadership.
Capitec led the rout on the banking stocks, falling 1.45 percent to R786.50 and Standard Bank at 0.89 percent to R151.99 and FirstRand also slowing 0.84 percent to R50.67. Nedbank eased 0.76 percent to R224.40 while Barclays fell 0.6 percent to R146.79
Bonds also weakened with the benchmark paper due in 2026 adding 0.5 basis points to yield 8.59 percent.
Nazmeera Moola, economist at Investec Asset Management said while the government bonds had held up well since the cabinet reshuffle and subsequent credit downgrades, this was “disguised” by inflows into emerging markets.
“Since the cabinet reshuffle we have had $12 billion in inflows into the asset class, but this must be put into context - emerging markets government bonds have been attractive compared to developed markets bonds I now expect growth for this year to be less than a percent, the reason we have growth at all is because of strong commodity prices and the rebounding agriculture figures,” Moola said.
Goldman Sachs head of investment banking in sub-Saharan Africa Colin Coleman said the country’s economy was at the risk of losing between $7 billion (R90 billion) to $10 billion in government bonds if it fell outside the WGBI as a result of the rand’s downgrades to sub-investment by Standard and Poor’s and Moody’s in the coming days.
Coleman said billions of dollars would be lost to South Africa and that this would shed as much as around 50 cents off the rand.
“Ninety percent of our debt in South Africa is local currency, so the local currency rating will have a significant impact on how investors behave, arguably more than the offshore currency ratings,” Coleman said. “If the local currency rating by Standard & Poor’s and Moody’s becomes sub-investment grade we will automatically fall off the WGBI and associated tracker funds invested in South Africa via the WGBI will be lost.”
Moody’s currently has South Africa’s credit rating at two notches above non-investment grade.
South African government bonds became the first African government bonds to be included in the WGBI in 2012.
At the time the bank said that the country had satisfied all three index requirements of size, credit, and lack of barriers to entry.
The WGBI was created in 1987 and includes 22 other sovereign markets, including Australia, Canada, Germany and the US.
Its entry requirements include a minimum capitalisation of $50 billion, a domestic long-term credit rating of A-/A3 by either S&P’s or Moody’s, and no barriers to entry. Many global bond funds are benchmarked against the WGBI.
Coleman, who also sits on the chief executive initiative which recently met with rating agencies representatives, said the agencies had expressed their concerns about the country’s medium prospects for growth.
“A major issue is sustaining fiscal consolidation. There are two aspects to this: whether the economy is growing fast enough to meet fiscal targets, and the risk potentially posed by rising expenditures including contingent liabilities of state owned enterprises.”