South African Bonds Crash, Rand Hits Record Low After FinMin Fired

Without giving any reasons, South African President Jacob Zuma has fired his finance minister (after just 19 months in office). This has shocked investors, already anxious about the nation's surging debt and sluggish economy and South African bonds and FX have collapsed. 10Y yields spiked 140bps to 10.18% - the highest since July 2008 - and CDS have soared. The Rand has crashed to new record lows above 15 to the USD.

The Rand has collapsed to record lows...


Bonds have crashed to 7 year high yields


And South Africa is now the 10th riskiest sovereign in the world...


As Bloomberg reports,

The shock move came less than a week after credit-rating companies pushed the nation closer to junk status, citing concerns over a sluggish economy and rising debt. Nene’s departure, and uncertainty relating to his successor, raises questions about whether the National Treasury can stick to its spending targets.


“Especially at this point in time, we can ill afford to antagonize international investors,” Mohammed Nalla, head of strategic research at Nedbank Group Ltd., said by phone from Johannesburg. “An event of this magnitude can even be the catalyst for a credit-rating downgrade to junk status. It could lead to a complete loss of investor confidence in South Africa, which could push us into a recession.”


“We are not so concerned about the person but rather whether Treasury controls the line on fiscal deficits and the debt stock, which we are watching,” Ravi Bhatia, director of sovereign ratings at Standard & Poor’s in London, said in an e-mailed response to questions. “South Africa is on negative outlook and our concerns highlighted in our last outlook statement remain.”


The economy is under strain because of plunging metal prices and power constraints. The central bank is forecasting growth of 1.4 percent this year, which would be the slowest pace since the 2009 recession.


Investors are concerned that “worsening macro performance will lead to a more politicized approach to fiscal policy and structural reform,” Arnab Das, head of EM Macro at Invesco in London, said by e-mail. “There is also a threat that further ratings downgrades may well lead to South Africa’s exclusion from global government bond indices in the next one to two years.”

Commerzabnk adds that President Jacob Zuma’s timing in removing Finance Minister Nhlanhla Nene “could not have been worse,” Peter Kinsella, head of EM FX research at Commerzbank, says in note.

Sacking has given rating agencies “perfect justification” for further downgrades and the loss of investment grade status


Investors should be cautious towards the rand, given that carry-trade strategies are “hardly working” and the commodity-price slump shows no signs of ending


“Put simply, this is no time to talk about valuation concepts for ZAR. Such strategies didn’t work before and are unlikely to now”


“If you are of the view that the majority of interest rate rectification by SARB has already taken place, then it makes little sense to liquidate bond positions at current levels”

The incoming Van Rooyen is the third finance minister since Zuma came to power in 2009. In that period, gross debt has surged from about 26 percent of gross domestic product to almost 50 percent. While Nene has sought to contain spending in a bid to rein in a widening budget deficit, his efforts have been frustrated by the government awarding above-inflation wage increases to workers over three years.

So that explains the carnage in capital markets.. the guy who wanted to instil at least some fiscal discipline... has been fired.

Charts: Bloomberg