Bloomberg News

Rand Falls First Day in 3 as Yields Rise on EU Growth Concern

February 22, 2012

Feb. 21 (Bloomberg) -- The rand weakened against the dollar for the first time in three days on concern a bailout deal for Greece won’t be enough to stave off a recession in the euro region, damping demand for South Africa’s exports.

South Africa’s currency depreciated 0.9 percent to 7.7472 per dollar as of 1:48 p.m. in Johannesburg, the worst performance out of more than 20 emerging-market currencies monitored by Bloomberg. It fell 0.6 percent to 10.2280 per euro. Bonds retreated for the first time in three days.

European finance ministers awarded Greece 130 billion euros ($173 billion) in aid by tapping into European Central Bank profits and coaxing investors into providing more debt relief to shield the region from a default. Africa’s biggest economy will probably expand less than 3 percent this year as fiscal problems in Europe, South Africa’s biggest trading partner, sap demand for exports, Finance Minister Pravin Gordhan said on Jan. 26.

“There was a huge build-up to the finalisation of the deal, and now that it has happened, the question is: what’s next?”, Ian Cruickshanks, head of treasury strategic research at Johannesburg-based Nedbank Group Ltd., said by phone. The deal hasn’t removed concerns about euro-zone growth, he added.

Gordhan, who will give updated forecasts in his budget speech tomorrow, said in October the economy would grow 3.4 percent this year. Gross domestic product expanded an annualized 1.4 percent in the third quarter, close to a two-year low.

‘Die Another Day’

“The bailout simply means that Greece lives to die another day,” John Cairns, a currency strategist at Rand Merchant Bank in Johannesburg, said in e-mailed comments. “The market has responded with a big yawn; after weeks of anxiously waiting, the deal is an anti-climax.”

The euro-region economy, which buys 22 percent of South Africa’s exports, contracted in the fourth quarter for the first time in 2 1/2 years as the region’s debt crisis undermined confidence and forced governments from Spain to Greece to toughen budget cuts. GDP in the 17-nation euro area fell 0.3 percent from the prior three months, the first drop since the second quarter of 2009.

Bonds dropped today on concern South Africa’s government borrowing requirement will rise as economic growth fails to meet projections, cutting into tax revenue, and as Transnet SOC Ltd., the state-owned rail and ports operator, sells bonds to pay for a 300 billion rand ($39 billion) infrastructure plan.

Budget Speech

Gordhan will probably forecast a shortfall of 5.4 percent of gross domestic product in the year through March 2013 in his budget speech tomorrow, according to the median estimate of 10 economists surveyed by Bloomberg.

“The market will, in the short term at least, be focused on supply guidance in tomorrow’s Budget speech,” George Glynos, an economist at Johannesburg-based ETM Analytics, wrote in e- mailed comments today. “The market will be watching” Transnet’s borrowing “to see how this fits into the already budgeted borrowing requirement going forward,” he added.

Investors were more pessimistic about South African debt than other emerging markets in the past six months. The cost to protect the country’s debt against non-payment for five years increased 43 basis points, or 0.43 percentage point, to 179 over the period, according to data provider CMA. Mexico swaps dropped 19 basis points, while Brazil’s declined 27 and Russia’s gained 8 during the same period.

The yield on South Africa’s 103 billion rand of 10.5 percent bonds due 2026 rose two basis points, or 0.02 percentage point, to 8.23 percent. The nation’s $1.5 billion of 4.665 percent notes due 2024 fell, driving the yield up eight basis points to 4.31 percent.

The extra yield investors demand to hold the South African securities over U.S. Treasuries of similar maturity widened one basis point to 2.26 percentage points. The spread has narrowed from 2.7 percentage points when the notes were first sold on Jan. 17.

--Editors: Peter Branton, Ash Kumar

To contact the reporter on this story: Robert Brand in Cape Town at rbrand9@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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