The rand headed for its biggest loss in more than a week as investors awaited a Moody’s Investors Service review that might see the country lose its last remaining investment-grade rating. SA bonds also fell.
The country's markets were also down as SA started a 21-day national lockdown with mixed results, and as it recorded its first deaths from the coronavirus outbreak that has wreaked havoc in markets across the world.
By 3.39pm, the rand was 1.4% weaker at R17.5690/$, its biggest drop since March 19, cutting its gain for the week to 0.3%. While emerging-markets fell broadly, the rand was among the worst performers, with only the currencies of Brazil, Russia and Mexico performing worse. The rand dropped to R17.8991/$ on March 23, a record low based on closing prices.
Even before the Covid-19 pandemic, which the central bank has predicted will lead to the country positing its first annual decline in GDP since 2009, investors were fretting about the country's deteriorating fiscal position.
A shrinking economy will further depress tax revenue, making it impossible for SA to narrow a budget deficit that was set to rise to 6.8%. Some economists are now pencilling in a gap of as much as 10% for 2020/2021.
The rand “is lagging its emerging-markets peers, despite there being adequate support to carry it to R17/$," said Rand Merchant Bank analyst Nema Ramkhelawan-Bhana. “Perhaps the uncertainty over Moody’s pronouncement is embedded in the price, reinforcing its stickiness. We believe that the agency will place SA on a review for downgrade with a firm decision manifesting in the next three months.”
The local currency is down more than 14% against the dollar in March and has lost more than 25% so far in 2020. It's set to have the wildest swings of any emerging-market currency other than the Russian rouble next week, according to Bloomberg data, which shows its implied volatility against the dollar at almost 30%.
SA's bonds, which were given some respite earlier in the week after the Reserve Bank announced liquidity measures to calm the market, including a plan to buy government bonds, resumed their weakening trend.
The generic 10-year bond yield, which moves inversely to the price, rose 18 basis points to 11.67%. The yield, which was below 9% in February, surged to an intraday record of 13.24% on March 24, with moves exaggerated by sellers struggling to find buyers.
Bond yields are a key signal of sentiment towards a country as they show the willingness or otherwise of investors to hold its bonds. Rising yields indicate heightened risk of suffering capital losses, or not even being repaid in extreme cases.
SA bonds fell despite gains elsewhere, with US treasury 10-year yields dropping to 0.75%, with no sign yet that the almost 11 percentage points yield advantage in favour of local bonds are enticing enough to draw buyers in a consistent way.
Moody's may release its report after US markets close on Friday.
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