Rand Declines as Lower U.K. Debt Outlook Curbs Risk Appetite

By Garth Theunissen

May 21 (Bloomberg) -- South Africa’s rand weakened against the dollar, reversing an earlier advance, after Standard & Poor’s cut the outlook on Britain’s credit rating to “negative,” curbing demand for higher-yielding assets.

The rand snapped a three-day advance after the outlook on the U.K.’s AAA credit rating was lowered from “stable” because of the increasing “debt burden” in Europe’s second-biggest economy, S&P said today. South African Reserve Bank Governor Tito Mboweni said yesterday the rand may weaken 4.25 percent this year.

“Sterling has taken a hit and that’s temporarily affecting risk appetite for emerging-market assets,” said Shahin Vallee, an developing-country currency strategist in London at BNP Paribas SA, France’s largest bank. “It’s not a lasting move and we should see emerging-market currencies stage a comeback once the market calms down.”

The rand declined 0.3 percent to 8.3910 per dollar as of 12:17 p.m. in Johannesburg. It also weakened versus 13 of the 16 most-actively traded currencies monitored by Bloomberg, losing 0.4 percent to 11.5766 per euro. Against the pound, it added 0.3 percent to 13.1384.

The rand strengthened earlier against the dollar after Moody’s Investors Service said yesterday a recession in Africa’s biggest economy would be “brief.” The ratings company said the $278 billion economy would return to growth in the third quarter amid increased government spending and lower interest rates.

Growth Forecast

South Africa’s economy probably shrank for a second quarter in the three months through March, after a 1.8 percent contraction in the final three months of 2008, Mboweni said May 19. The central bank has cut its main interest rate four times since December, to 8.5 percent, to boost growth as the country slides into its first recession in 17 years.

Government bonds fell, with the yield on South Africa’s benchmark 13.5 percent security due September 2015 adding five basis points to 8.15 percent. Its price, which moves inversely to the yield, fell 30 cents to 125.91 rand.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net