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Rand plummets on bleak budget projections

The projected deficit would be the highest since 2009/10, raising investor concerns about South Africa’s only remaining investment-grade credit rating, which will be reviewed by Moody’s on Friday.

South African rand.  Picture: Christa Eybers/EWN

JOHANNESBURG - The rand suffered its steepest fall in more than a year on Wednesday after Finance Minister Tito Mboweni forecast wider budget deficits and a sharp increase in debt during his medium-term budget policy statement.

The rand was down more than 2.4% at R14.9810 against the US dollar by 1533 GMT, partially recovering from an earlier 3% drop from Tuesday’s close.

The Treasury said the budget deficit was likely to reach 5.9% of gross domestic product this fiscal year, far above a previous estimate of 4.5%.

The projected deficit would be the highest since 2009/10, raising investor concerns about South Africa’s only remaining investment-grade credit rating, which will be reviewed by Moody’s on Friday.

“From a ratings agency point of view the debt is unsustainable,” said Cristian Maggio, head of emerging markets strategy at TD Securities.

“There is no way that South Africa can escape a downgrade. It may not happen immediately, it may take some time because ratings agencies follow certain procedures, but it will happen,” he said.

Africa’s most industrialised economy is battling to kick-start economic growth and investor sentiment is fragile after a string of massive bailouts for ailing state firms like power utility Eskom.

South African government bonds dropped sharply, with the yield on benchmark 2026 paper up 23.5 basis points to 8.435%.

Local stocks rebounded in the late afternoon as rand hedges gained because of the weaker domestic currency.

The Johannesburg Stock Exchange’s Top-40 Index closed up 0.31% at 49,629.32 points, while the broader All-Share Index was up 0.29% to 55,872.60 points.

Gold miners Sibanye-Stillwater and Gold Fields climbed 8.1% and 6.6% respectively, helped by a stronger gold price as well as the weaker rand.

Investors were also gearing up for a policy decision by the US Federal Reserve later in the day that could see a third cut in interest rates this year.

“The market is already factoring in a 25 basis point cut,” GT247 trader Paul Chakaduka said.