Shock Turns to Hope as Traders Bet S. Africa Can Dodge Downgrade

(Bloomberg) -- Just minutes into his maiden budget speech, Finance Minister Tito Mboweni looked to have sparked a market rout.

The eye-popping prediction that the proportion of government debt to gross domestic product would top 60 percent by 2024 sent the rand down as much as 2.3 percent, wiping out this year’s gains. The yield on the nation’s debt due 2026 briefly pierced the 9 percent level.

But a rescue plan for foundering power utility Eskom Holdings SOC Ltd. calmed traders’ nerves as it appeared to avert a South African credit-rating downgrade from Moody’s Investors Service, at least for now. Eskom, which supplies 95 percent of the country’s electricity, will receive a 69 billion rand ($4.9 billion) cash injection over the next three years to help service its debt. Part of the utility’s transmission business will also be sold to private investors.

“Moody’s should like this,” said Geoff Kendrick, a London-based strategist at Standard Chartered, which took profit on its position in the lira versus rand cross.

The rand was trading 0.1 percent lower as of 4:53 p.m. in Johannesburg, and the yield on government debt due 2026 declined three basis points to 8.84 percent. Bearish bets on the rand, which were the highest in emerging markets before Mboweni’s speech are now second to Turkey’s lira. The currency’s one-week 25 Delta risk reversal narrowed by the most since Jan. 17.

Moody’s is scheduled to assess South Africa’s debt on March 29. A cut to South Africa’s credit rating would see government bonds ejected from the World Government Bond Index, with outflows from the bond market of between $8 billion and $10 billion, according to Investec Bank Ltd.

“The government isn’t shying away from confrontation with the unions and is seeking equity partners for the transmission unit,” said Henrik Gullberg, a Nomura International Plc strategist in London. “This is the best that realistically could have been hoped for.”

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