South African rand, bonds plunge as Gordhan’s budget disappoints

South Africa’s rand plunged the most in five weeks against the dollar and bond yields soared after Finance Minister Pravin Gordhan failed to convince traders that the nation can avert a credit downgrade to junk.

The currency dropped as much as 2.4 percent, the biggest intraday slump since Jan. 15, and traded 2.3 percent weaker at 15.5797 per dollar by 3:58 p.m. in Johannesburg. Yields on benchmark government rand bonds due December 2026 climbed 15 basis points to 9.31 percent, the highest on a closing basis since Feb. 8. The yield on South Africa’s 2025 dollar-denominated bonds rose 9 basis points, the most in more than two weeks. Stocks pared losses as companies that benefit from declines in the rand gained.

In his budget speech to lawmakers in Cape Town on Wednesday, Gordhan stuck to a pledge to bring down the budget deficit, targeting civil-servant jobs and increasing wealth taxes. The speech didn’t include enough details about how the government intended to narrow the fiscal shortfall, according to Warrick Butler, the Johannesburg-based head of emerging-market spot trading at Standard Bank Group Ltd. A slump in currencies of other commodity-producing currencies including Russia and Norway also weighed on the rand, he said.

“Lots of stories, no follow-through,” Butler said via e-mail. “A lot of what he proposes is based on future tax income. I think the market wanted to hear sale of state-owned enterprises, increased tax, and so on.” The rand was also weakening Wednesday as risk-averse investors reduced emerging-market holdings, he said.

Moody’s Investors Service on Wednesday cut Brazil’s credit rating to junk, adding to investor concerns that the outlook for emerging-market currencies may deteriorate. Nineteen out of 24 developing-nation currencies fell against the dollar, according to data compiled by Bloomberg.

Johannesburg’s FTSE/JSE Africa All Shares Index was 0.9 percent lower, after earlier declining as much as 2.1 percent. The benchmark was supported by gains in industrial companies with earnings abroad, said Simon Brown, a trader at Just One Lap.

“It’s almost exclusively been the industrial index that’s driven it higher, and that could be to a degree on the back of the rand which has weakened,” Brown said by phone from Johannesburg. “We haven’t seen a broad rally in what I would call SA Inc. stocks. A little bit of a rush into the multinationals — British American Tobacco and the like. More than anything, that’s pushed our market higher.”

British American Tobacco was 0.9 percent higher, while SABMiller Plc’s South African-traded stock advanced 1.4 percent by 3:38 p.m.

South Africa hasn’t done enough to avert a downgrade, said  Christie Viljoen an economist at KPMG. Standard & Poor’s has a negative outlook on its rating of BBB-, the lowest investment grade. Fitch Ratings has an equivalent assessment on South African debt, with a stable outlook. The two companies are due to review their ratings in June and December. Moody’s rates the nation two levels above junk, with a negative outlook.

“If we don’t get growth to improve, then yes we will get downgraded,” said Mokgatla Madisha, head of fixed income at Argon Asset Management Pty. “It doesn’t really matter whether it’s June or December, that’s what we need to solve. There was not enough in what I’ve heard today to suggest that enough reforms are going to be announced between now and then to change that growth trajectory meaningfully, and that is a problem.”

– Bloomberg