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EMERGING MARKETS-Rand rises as South Africa dodges double downgrade
November 27, 2017 / 10:19 AM / in 16 days

EMERGING MARKETS-Rand rises as South Africa dodges double downgrade

LONDON, Nov 27 (Reuters) - South Africa’s rand bounced against the dollar on Monday after the country avoided a double downgrade of its local currency debt, although broader emerging markets fell amid jitters over weakness in Chinese and tech shares.

Emerging equities fell one percent dragged down by heavy selling in Asia where Chinese stocks resumed their slide and semi-conductor companies also lost ground.

But a dollar index languishing at two-month lows offered fresh impetus to the rand, which benefited from only S&P Global cutting it to junk on Friday, whilst Moody’s kept it on review.

A cut by both agencies would have ejected South Africa’s $125 billion debt market from key bond indexes, potentially triggering more than $10 billion in debt. But S&P cut South Africa’s rating to ‘BB+’ while Moody’s decided against a downgrade.

The rand bounced 1.7 percent, after tumbling 2 percent on Friday, whilst average yield spreads of South African dollar bonds over Treasuries narrowed by 5 basis points (bps) to 282 bps, a near one-month low.

Yields on benchmark local bonds rose around 6 bps, though South Africa’s average premium versus other emerging debt on the GBI-EM index is approaching 400 bps.

“The market is taking it quite well as it’s not a double downgrade which was the worst case,” said Manik Narain, an emerging FX strategist at UBS.

“But I don’t think this is a very strong buying opportunity given the downside risks that are still ahead. This is a 2-3 percent current account deficit economy with significant risks of outflows.”

South Africa said it would use next year’s budget to strengthen its fiscal framework.

Simon Quijano-Evans, an emerging markets strategist at Legal & General Investment Management, noted that Moody’s had kept South Africa eight notches above Ukraine, “sending a very wrong message to governments, namely that reforms just don’t matter”.

He added credit default swaps (CDS) showed markets pricing in more downgrades for South Africa, noting its five-year CDS at 191 bps prices higher risks than in worse-rated Croatia.

Elsewhere, heavy selling across Asia pushed MSCI’s benchmark emerging stocks index to one-week lows, after Chinese blue chips fell 1.3 percent adding to the previous week’s losses.

Investor confidence has been dented by rising bond yields and authorities’ efforts to crack down on leverage.

The selloff came despite a surge in Chinese industrial profits in October.

South Korean stocks also tumbled 1.4 percent to a near one-month low amid a slump in tech shares following a Morgan Stanley report that the memory chip boom was peaking.

Samsung Electronics shares fell 5 percent to a one-month low. Taiwan shares also fell around 1 percent.

But dollar weakness lifted many emerging currencies, with even the Turkish lira, which plumbed record lows last week, up 0.2 percent.

The forint also firmed 0.4 percent against the euro to a near three-week high as China pledged over $3 billion for regional investment projects. For GRAPHIC on emerging market FX performance 2017, see tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2017, see tmsnrt.rs/2dZbdP5

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see) Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg

on year

Morgan Stanley Emrg Mkt Indx 1145.26 -9.00 -0.78 +32.82

Czech Rep 1053.39 -1.28 -0.12 +14.30

Poland 2483.44 +4.19 +0.17 +27.49

Hungary 39655.78 -53.22 -0.13 +23.91

Romania 7765.27 -17.53 -0.23 +9.60

Greece 723.02 -0.16 -0.02 +12.33

Russia 1165.50 -0.59 -0.05 +1.14

South Africa 54111.72 +113.58 +0.21 +23.26

Turkey 04668.28 +128.87 +0.12 +33.95

China 3322.83 -30.99 -0.92 +7.06

India 33689.02 +9.78 +0.03 +26.52

Currencies Latest Prev Local Local

close currency currency

% change % change

in 2017

Czech Rep 25.43 25.44 +0.03 +6.21

Poland 4.21 4.21 +0.03 +4.69

Hungary 311.05 312.00 +0.31 -0.72

Romania 4.64 4.64 +0.01 -2.20

Serbia 119.70 119.09 -0.51 +3.05

Russia 58.17 58.37 +0.34 +5.32

Kazakhstan 330.96 330.25 -0.21 +0.81

Ukraine 26.83 26.90 +0.28 +0.65

South Africa 13.93 13.87 -0.42 -1.43

Kenya 103.25 103.20 -0.05 -0.85

Israel 3.51 3.51 +0.01 +9.83

Turkey 3.93 3.94 +0.20 -10.37

China 6.60 6.60 +0.01 +5.21

India 64.56 64.67 +0.17 +5.24

Brazil 3.23 3.23 -0.00 +0.63

Mexico 18.54 18.56 +0.12 +11.75

Debt Index Strip Spd Chg %Rtn Index

Sov‘gn Debt EMBIG 316 -1 .03 8 03.11 1

All data taken from Reuters at 09:35 GMT. Currency percent change calculated from the daily U.S. close at 2130 GMT.

Reporting by Claire Milhench; additional reporting and graphic by Sujata Rao; Editing by Keith Weir

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