Second Junk-Rating Blow Sends South African Assets Tumbling

South African RandMixed denomination rand currency banknotes are arranged for a photograph at a First National Bank (FNB) branch in Johannesburg, South Africa. Photographer: Nadine Hutton
  • Second Junk-Rating Blow Sends South African Assets Tumbling

South Africa’s rand plunged to the weakest level this year and yields on dollar bonds jumped after Fitch Ratings Ltd. became the second company to cut the country’s credit assessment to junk, triggering sales by some funds tracking investment-grade debt indexes.

President Jacob Zuma plunged South Africa into a political crisis when he fired Finance Minister Pravin Gordhan March 31, prompting a drop in the rand and triggering a downgrade to junk from S&P Global Ratings. The move by Fitch means the country’s foreign-currency debt will now be considered sub-investment grade, and brought the local-currency assessment to the cusp of junk.

“If South Africa is downgraded by Fitch then we could be facing a sub-investment grade rating on both our local and foreign currency debt,” Gordon Kerr, a fixed-income trader at FirstRand Ltd., said before the announcement. “That becomes a trickier situation for our local bonds as the future of our inclusion in several major world bond indices becomes questionable.”

Fitch reduced the foreign-currency and local-currency ratings to BB+, the highest non-investment grade, from BBB-. The outlook is stable.

The rand weakened as much as 0.6 percent before trading 0.3 percent down at 13.8079 per dollar by 1:44 p.m. in Johannesburg. Yields on benchmark dollar bonds due October 2028 rose five basis points to 5.14 percent.

About the Author

Samed Olukoya
CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and, with over a decade long experience in the global financial market. Contact Samed on Twitter: @sameolukoya

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