South African government bonds weaker after S&P downgrade, rand firmer

South African government bonds weakened on Monday after S&P Global Ratings on Friday downgraded the country’s local currency debt to sub-investment grade, while foreign currency debt was pushed deeper into “junk” territory.

The rand ZAR=D3 recovered some of its lost ground after tumbling 2 percent on Friday following S&P’s announcement, with traders saying Moody’s decision to only place South Africa on review for downgrade had brought some relief to the currency.

The yield for the benchmark government bond ZAR186= rose 3.5 basis points to 9.37 percent as of 0852 GMT, after falling as much as 11 basis points earlier.

However, the currency was trading at 13.9300 per dollar, 1.5 percent firmer than its New York close on Friday.

“The market is finding some relief in the fact that Moody’s has chosen to give us basically till February before they change our rating, if they do change our rating,” said Shaun Murison, currency strategist at IG Markets.

Moody’s rates South Africa’s foreign and local currency debt on their lowest investment grade rung of Baa3.

The agency said the review will allow it to assess the South African authorities’ willingness and ability to respond to the rising pressures through growth-supportive fiscal adjustments that raise revenues and contain expenditures.

“The review period may not conclude until the size and the composition of the 2018 budget is known next February,” Moody’s senior analyst for South Africa, Zuzana Brixiova, said in a statement.

The National Treasury said on Saturday it would outline “decisive” policy to strengthen South Africa’s fiscal framework in the annual budget next year.

Both S&P and Moody’s cited deterioration in South Africa’s economic growth prospects and public finances.

If nothing changes “the country will be downgraded to ”junk“ by all ratings agencies and the WGBI dream will be no more, at least for many a year,” said Standard Bank chief trader Warrick Butler in a note, referring to Citi’s World Government Bond Index (WGBI).

“What this means, in terms of the currency, will be increased volatility.”

A cut to “junk” on the local currency debt by both S&P and Moody’s could have seen South African debt lose its place in Citi’s WGBI, the biggest of the global benchmarks and tracked by about $2-3 trillion of funds.

S&P lowered the long-term local currency sovereign credit rating to ‘BB+’ from ‘BBB-‘, and also cut the long-term foreign currency rating deeper into sub-investment grade territory, lowering it to ‘BB’ from ‘BB+’.

But S&P decision will see South Africa excluded from the Barclays Global Aggregate index, whose inclusion criteria requires investment grade rating on its local currency debt from any two ratings agencies.

Fitch already rates South African debt as “junk”, and affirmed the rating on Thursday.

Analysts said an exclusion from the Barclays index would lead to outflows of about $2 billion, compared with more than $10 billion if South Africa was to fall out of Citi’s WGBI.

South African debt was dropped from one the widely used global bond indexes, the JPMorgan Emerging Market Bond Index Global in April after S&P and Fitch downgraded foreign currency debt to sub-investment grade.

On the stock market, the Top-40 .JTOPI index was 0.1 percent higher at 54,050 while the broader all-share .JALSH was up 0.1 percent at 60,387.