South Africa’s rand hits record low after debt downgrade

The South African rand hit a record low against the US dollar after Moody’s removed the last investment-grade credit rating for Africa’s most industrialised economy, citing the hit to economic growth from the coronavirus pandemic.

The rand weakened as much as 2 per cent to move past 18 against the US dollar on Monday, following the rating agency’s downgrade of South African debt to junk on Friday. By mid-afternoon, the currency had regained a little ground to trade at 17.99.

The Moody’s downgrade completed South Africa’s descent into junk status after rivals S&P Global and Fitch Ratings removed their investment-grade ratings in 2017, highlighting mounting strains on public finances and persistently poor economic growth.

South African bonds will now be removed from indices used worldwide to track investment-grade debt, adding to pressure on the currency as some investors will be forced by their mandates to sell their holdings.

Moody’s kept the country’s debt on a negative outlook as it said that the shutdown of pandemic-struck economies around the world “will exacerbate” economic and fiscal challenges.

“South Africa is entering a period of much lower global growth in an economically vulnerable position,” the rating agency said. “The government’s own capacity to limit the economic deterioration . . . is constrained.”

The country is under a three-week lockdown ordered by president Cyril Ramaphosa. Cases of coronavirus in South Africa have surged past 1,000.

Even before the crisis, government debts were expected to rise to more than two-thirds of economic output as a result of costly bailouts for struggling state companies and weak growth.

“To say we are not concerned and trembling in our boots about what might be in the coming weeks and months is an understatement,” said Tito Mboweni, the South African finance minister, at the weekend.

FTSE Russell, operator of the widely-used benchmark World Government Bond index, has postponed the removal of South African bonds until the end of April because of what it called “extremely stressed” markets.

South African bonds have a weighting of about 0.4 per cent in the index, which implies up to $10bn of forced selling, according to UBS analysts. They said part of this outflow was likely to have taken place, adding: “As a rough rule of thumb, we estimate that a $5bn portfolio outflow shock can be neutralised by a 5 to 10 per cent depreciation in the real exchange rate.”

The rand has lost more than a quarter of its value this year.

South African government debt has sharply sold off in recent weeks as investors pulled money out of emerging markets at a record pace.

The yield on South African 10-year bonds rose above 12 per cent last week before the country’s central bank announced it would begin buying government debt in secondary markets to calm the turmoil.

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