Rand buyers turned their backs on the rand yesterday as it witnessed a staggering fall out of about 41% at the weekly fixed-rate government bond auction.
Despite the attempt to encourage foreign investors in the UK and US by the Finance Minister Pravin Gordhan alongside his efforts to provide updates on the latest economic developments in South Africa, and plans for the medium term, the investors bond continues to slow down to a more disturbing rate.
The Reserve bank revealed that the rand shed 1% against the dollar, with riskier emerging markets on the back foot as investors sought safer assets in the aftermath of terror attacks in Belgium yesterday morning.
Investors were said to have bid for R4.54 billion of R2.35bn of securities on offer, compared with bids of R7.675bn at the previous auction on March 15 and the currency stumbled to a session low of R15.38 to the greenback, before clawing back some ground to be bid at R15.2445 to the dollar by 5pm of March 22nd.
“The rand will still remain fragile as the political developments continue to unfold,” analysts at Nedbank said.
Though analyst see no big deal about preparing the country for a soft landing in junk territory as contemplated by rating agencies, political uncertainties alongside other pressing issues have been attributed to the rand’s fall.
Apparently, downgrading south Africa to “Junk status”will affect the nation’s economy; it will significantly raise the cost of borrowing.
According to the head of research at NKC African Economics Francois Conradie, a big exit of capital and investment would likely occur as the result of the downgrade as the result of a downgrade was unlikely because it had already been priced into bond yields.
“Although the effects of a downgrade itself in a mechanical way may be limited, there is still plenty of danger of a hit to the economy from worsening sentiment and risk perceptions, where political factors play an important role.” he added.
Per Hammarlund, the chief emerging market analyst at SEB in Stockholm, who categorically blamed the said the rating agencies were roundly criticized for being slow to react during the 2008 crisis, as well as the 2011 euro zone crisis. “They are going to be much more trigger happy this time,” Hammarlund added
In what finance minister Gordhan called a report back of the Treasury’s non-deal roadshow in the UK and US, it emerged that either S&P and Fitch was due to put South Africa’s credit rating on review for a downgrade, which was later postponed to June, after the Budget.
Though Gordhan still speaks of the country taking concrete action to avoid a downgrade to sub-investment grade, South Africa is expected to join its fellow Brics members Russia and Brazil alongside Greece, Argentina and the Ukraine in the club of junk status.