South African Finance Minister Pravin Gordhan said he’s concerned by the risk of capital outflows as investors snap up local-currency bonds in search of yield.
Managing unpredictable movements of cash is an issue all major emerging markets, including Brazil, face, Gordhan said in an interview in London today. The world needs a coordinated effort to smooth out volatility, he said, adding that South Africa doesn’t have many domestic instruments to manage the rand’s fluctuations.
“Clearly a risk that all of us see is a sudden change in sentiment,” Gordhan said. “Once there have been good inflows there might be unanticipated outflows and the message that we send to the global community and in particular to those that have excess liquidity is be aware of the spillover effects.”
Foreign investors boosted their holdings of South African local-currency notes to 36 percent at the end of 2012 from 29 percent a year earlier, according to data from the National Treasury. That compares with 30 percent ownership by local pension funds, down from 33 percent at the end of 2011.
While “we appreciate the interest” in local bonds, “in the global context we argue for more coordination, less volatility, less sentiment-driven flows into and out of emerging markets,” Gordhan said.
Yields on benchmark government bonds due Feb. 2023 dropped 12 basis points today to 6.16 percent, a record, after the European Central Bank lowered its benchmark interest rate to 0.5 percent. South Africa’s key policy rate is 5 percent.
Even after falling 66 basis points since the beginning of March, South African 10-year yields remain the highest after the Ukraine and Russia among emerging-market nations in Europe, the Middle East and Africa tracked by Bloomberg.
The rand has lost 5.5 percent against the dollar this year, making it the worst performer of the 24 major emerging-market currencies tracked by Bloomberg. Brazil’s real has strengthened 2 percent in the same period, according to data compiled by Bloomberg.
“We don’t have too many instruments to deal” with the rand’s volatility, Gordhan said. “Our approach and the central bank’s approach is to let the rand do what it has to do.”
The currency of South Africa, the world’s fifth-biggest gold producer, is losing ground as the price of the metal is poised to post its first annual decline since 2000, according to the median forecasts of 38 estimates compiled by Bloomberg.
Bullion slumped into a bear market in April even as central banks printed money on an unprecedented scale, Europe’s debt crisis spread and the International Monetary Fund made a fourth consecutive cut to its 2013 economic growth forecast.
“The gold price itself will not necessarily go into terminal decline,” Gordhan said. “These things fluctuate with time and depend on sentiment.”
The government’s revenue targets already take into account the slide in metal prices, the minister said, adding that he is “reasonably comfortable” with the outlook. There is also “more optimism” that the economy can grow faster than the 2.7 percent estimated in February, he said.
South Africa may borrow $1.5 billion from international markets this year, including possibly issuing its first Islamic bond, according to Gordhan.
“The sukuk bonds are an important new innovation in the South African context,” he said. “We’ve designed the concept, we’ve started the process of getting the necessary allocations determined and I’m hoping that by the end of the calendar year if not by the end of the financial year we’ll see the first product coming to market.”
The debut dollar-denominated issue, likely five to seven years in duration and less than $1 billion in size, is set to be used to finance schools, roads and other social infrastructure development, Thuto Shomang, head of the National Treasury’s Asset and Liability Management Division, said in London today.
“The challenge for us is not ourselves,” Gordhan said. “The challenge for us is that there must not be any other extraneous shocks that might destabilize the kind of direction we want to go in.”
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