South Africa’s rand weakened against the dollar on Friday (28/09/2012) after Moody’s cut the government’s bond rating by one notch to Baa1 from A3, but bonds were supported by their imminent accession to Citi’s prestigious World Government Bond Index (WGBI).
The ratings agency cited worries about the government’s institutional strength and South Africa’s investment climate and political stability. The credit outlook remains negative.
The rand was trading at 8.24 against the greenback at 0636 GMT compared to Thursday’s 8.2260 New York close.
On Thursday, the currency dropped 0.6 percent to 8.2850 following the Moody’s announcement.
Despite the Moody’s downgrade, traders said South Africa could still receive foreign inflows of anywhere between $2-$8 billion from funds that track the WGBI, which formally admits South African bonds on October 1.
"We expect to see interesting trade today, basically looking for a little bit of rand strength on the back of the WGBI inclusion,” said Brigid Taylor, head of institutional sales at Nedbank.
"But investors remain relatively cautious as we go into October with the potential for another downgrade around the medium-term budget statement which will happen at the end of October.”
Analysts say Moody’s announcement will not affect South Africa’s inclusion in the World Government Bond Index because it had already met the entry criteria three months ago.
Expulsion from the WGBI would only come with a rating below BBB- from S&P and Baa3 from Moody’s.
Government bonds were slightly weaker, giving back some of their gains from the previous session on the back of the downgrade.
The yield on the 3-year bond added 1 basis point to 5.33 percent. That on the 14-year paper added the same amount to 7.34 percent.
"The bond market reflecting some of that concern around the downgrade from Moody’s as well as the potential for a further downgrade. However the WGBI inclusion does keep it anchored at these kind of levels,” Taylor said.
Treasury is selling a total of 800 million rand ($970 million) spread over inflation-linked I2025, I2050 and I2038 government bonds at 0900 GMT. ($1 = 8.2400 South African rand) - Reuters