Forward-rate agreements, used to wager on rates, dropped the most since Aug. 23, signaling investors are increasing bets on a reduction in the next six months. The yield on two-year swaps, contracts used to secure borrowing costs, fell six basis points to the lowest since July 27. That compares with a one basis-point increase in the yield of similarly dated contracts in Turkey and Russia and rates that were little changed in Poland and Malaysia, according to data compiled by Bloomberg.
The Reserve Bank, which cut its benchmark repurchase rate for the first time in 20 months in July to spur the economy, held the rate at 5 percent on Sept. 20 because of rising food and fuel prices. Last month’s decision “was not an easy one,” Marcus said yesterday in a speech to the Nordic Business Chamber of South Africa in Johannesburg.
“Last week we would have thought a cut was out of the question,” Jeremy Fox, a fixed-income trader at FirstRand Ltd.’s Rand Merchant Bank unit, said by phone from Johannesburg yesterday. “When she comes out and says how close they were to cutting rates, maybe we underestimated how close they were to making that decision.”
‘Home-Grown’
Policy makers led by Marcus unexpectedly cut the benchmark rate to the lowest level in more than 30 years on July 19 to 5 percent. Since then, reports have shown that manufacturing output, which accounts for about 15 percent of the economy, contracted in the second quarter and probably shrank again in the next three months as Europe’s debt crisis sapped demand for the nation’s goods.
The yield on the government’s 6.75 percent debt due in March 2021 fell nine basis points to 6.58 percent yesterday and was unchanged at 9:35 a.m. in Johannesburg. The rand fell 0.8 percent to 8.4336 per dollar. The currency has weakened 4.1 percent this year.
South Africa is “beset by its own challenges” amid “extreme uncertainty” in the global economy, the outlook for which has weakened, Marcus said. Reaching last month’s decision was as difficult as any of the central bank’s policy announcements, she said.
Illegal Strikes
The Monetary Policy Committee cut its growth forecast for South Africa to 2.6 percent for this year at the Sept. 20 meeting, from 2.7 percent. It cited concern about Europe’s debt crisis and illegal strikes that started at Lonmin Plc’s Marikana platinum mine in August and swept across South Africa’s mines, with almost one-fifth of the industry’s 500,000 workers involved in protests.
“The probability of the MPC cutting rates has got to be 50-50,” said Mark le Roux, who oversees fixed-income investment among $29 billion of assets at Cape Town-based Coronation Asset Management Ltd. “The MPC is very focused on growth and very focused on what’s going on in the global scenario.”
Inflation quickened to 5 percent in August from 4.9 percent a month earlier, the first increase in the rate in four months. While inflation will remain within the bank’s target of 3 percent to 6 percent through 2014, rising food and fuel prices may spread in the economy, Marcus said.
Supply Shocks
“Supply side shocks in the form of higher food prices, due to droughts in the U.S. and some parts of Eastern Europe, and resilient international crude-oil prices pose potentially serious risks to the outlook,” Marcus said. “The combination of slowing growth and rising prices presents difficult challenges for monetary policy.”
The government raised the gasoline price 1.9 percent today, after increasing it 8.4 percent last month. Oil, which South Africa imports, has gained 1.2 percent in the past week. Corn rose to a record $8.49 a bushel on Aug. 10 on the Chicago Board of Trade.
The extra yield investors demand to hold South African dollar bonds rather than U.S. Treasuries dropped 85 basis points, or 0.85 percentage point, this year to 176, as investors were lured by rates higher than those available in Mexico, Brazil, Malaysia and Hungary, according to JPMorgan Chase & Co. indexes. That compares with an average yield spread of 303 for emerging markets.
Wider Deficit
The cost of protecting South African debt against non- payment for five years using credit-default swaps fell two basis points yesterday to 142, indicating improved risk perceptions, according to data compiled by Bloomberg. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if the government fails to adhere to its agreements.
The current account deficit will probably end the year at 5.8 percent of gross domestic product, limiting the room the Reserve Bank has to stimulate the economy, Mohammed Nalla, an analyst at Johannesburg-based Nedbank Group Ltd. said by phone yesterday. The current account is the broadest measure of trade in goods and services. The shortfall widened to 6.4 percent in the second quarter and may increase further after the trade deficit jumped to the most in seven months in August.
“When international investors look at a country the warning flag is around the 6 percent level,” Nalla said. “We are getting pretty close to that territory and that’s going to go firmly on the governor’s agenda in terms of something she should be looking at, at the next MPC meeting.”
“The spillover of global factors to our economy can be profound, changing the size and direction of capital flows, global inflation, trade, commodity prices, and more,” Marcus said. South Africa must develop policy and regulatory frameworks and adjust its policy stance “to do as much as we can to offset harmful economic effects from abroad,” while encouraging local economic growth and development, she said.
“She certainly isn’t talking about rate hikes,” Coronation’s Le Roux said. “And that’s just rallied the bonds and the forward-rate agreements.”
Source: Bloomberg
