Rand takes a beating

The rand weakened the most in five months and benchmark bonds sold off as rolling power cuts, flood damage and signs of a Covid comeback added to worries about the country’s economic outlook.

As global concern over rising US interest rates sent emerging-market currencies into reverse, the rand weakened more than 2% against the dollar on Tuesday, the biggest daily decline among the asset class.

Eskom warned the country may have more than 100 days of electricity blackouts this year because of outages and government will ask parliament for additional funding of R1-billion to repair infrastructure damaged by deadly floods in KwaZulu-Natal.

This hampers plans to reduce the budget deficit and curb government debt, a key factor preventing credit-rating upgrades. In addition, growing evidence of a resurgence of Covid “could complicate” South Africa’s economic recovery, said Brendan McKenna, an currency strategist at Wells Fargo Securities in New York.

The rand slumped 2.2% to R14.97/US$ by 4.54pm on Tuesday, the most since November 2021. The yields on 2032 government bonds climbed 18 basis points to 10.31%.

“There were some pretty severe floods in South Africa recently that caused a fair amount of damage,” McKenna said. “Looks like the government is asking for funds to start rebuilding, which could add to the debt burden and fiscal deficit.”

He said that public finances in the country were “already in bad shape, so that could be weighing on the currency, too”.

Treasury yields surged on Tuesday as inflation fuelled by the war in Ukraine and supply-chain chaos bolstered expectations for tightening by the Federal Reserve, strengthening the dollar.  — (c) 2022 Bloomberg LP