The rand dropped to a three-year low as strikes spread across South Africa’s mining and transportation industries, raising concern the government may miss fiscal targets and boosting the cost of insuring the nation’s debt.
The currency retreated 3.1 percent to 8.7941 per dollar at 2:25 p.m. in New York after touching 8.8465, the weakest level since May 2009. The rand has declined 5.4 percent since Sept. 28, its worst weekly performance since September 2011. The currency has fallen 7.9 percent this year, vying with the Brazilian real as the biggest loser among the greenback’s most- traded counterparts. Yields on benchmark 6.75 percent bonds due 2021 rose 13 basis points, or 0.13 percentage point, today to 6.73 percent, the highest since Sept. 17.
Anglo American Platinum Ltd. (AMS) fired 12,000 workers today as illegal stoppages increased. The South African Transport and Allied Workers Union said port and railway workers may join a road-freight strike. Finance Minister Pravin Gordhan is struggling to keep spending in check to control the budget deficit as the labor unrest cuts output and tax revenue, prompting Moody’s Investors Service to lower the country’s credit rating by one level to Baa1 on Sept. 27.
“It’s just general panic-driven pandemonium; I don’t think any of that news can be good for the rand,” William van Rijn, a currency dealer at Johannesburg-based Nedbank Group Ltd. (NED), said by phone. “Every dip obviously attracts local importers; they have reached the point where they are no longer living in hope and are covering whatever they can.”
The cost of insuring South Africa’s debt climbed the most in two weeks as strike action escalated and police said they found the body of a man near a mine belonging to Anglo American Platinum .
Credit default swaps over five years surged 10 basis points, the biggest jump since Sept. 20, when Lonmin Plc (LMI) gave workers pay increases of as much as 22 percent, fueling concern more workers would use violence to press wage demands, to 161. A gauge of South Africa’s dollar debt maturing in one to three years lost 1.2 percent, more than any other sovereign index compiled by EFFAS and Bloomberg.
Foreign investors bought a net 7.35 billion rand of South African bonds since they were included in Citigroup Inc.’s World Government Bond Index on Oct. 1. Buying levels of the bonds were unsustainable, with the rise in inflows attributable to the inclusion of the country’s debt in the gauge, Reserve Bank Governor Gill Marcus said Oct. 3.
“The rand could potentially depreciate 5 percent to 10 percent from here as strikes stagnate gross domestic product, investors and agencies continue to downgrade and incremental bond portfolio flows dissipate now South Africa has been added to the WGBI,” Emad Mostaque, London-based strategist at Religare, said by e-mail.
South Africa’s current account deficit, the broadest measure of trade in goods and services, widened to 6.4 percent in the second quarter and may increase further after the trade deficit jumped to the most in seven months in August.
The central bank cut its growth forecast to South Africa to 2.6 percent this year on Sept. 20, from a previous estimate of 2.7 percent, citing concern over the strikes and Europe’s debt crisis. Gordhan has pledged to reduce the budget deficit to 3 percent of gross domestic product by the year ended in March 2015 from 4.6 percent this year. He is scheduled to give revised revenue and spending targets at a mid-term budget on Oct. 24.
“The strikes are spreading; there is the underlying backdrop of a large current account deficit; we saw runs in 1996 and 2001 based on local problems,” John Cairns and Josina Solomons, currency strategists at Rand Merchant Bank in Johannesburg, wrote in e-mailed comments to clients. “The impact of strike action on tax revenue cannot be positive and will increase the probability of the government missing its fiscal targets.”
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