Maturity: December 12, 2007
Issue price: 97.00
Launched: Tuesday November 13
Lead mgr: RBC CM
Compiled by Richard Favis, RBC Capital Markets, Johannesburg
Tel: +27 11 784 5065
South African markets were in limbo this week, waiting eagerly to see whether the South African Reserve Bank (SARB) would decide to cut interest rates further. The SARB's monetary policy committee (MPC) meeting was moved forward one day and it announced that it would leave interest rates unchanged. This was in line with economists' expectations, despite a global environment of falling interest rates and domestic inflation falling within the SARB's target range of 3%-6% for CPIX (headline inflation less mortgage costs, which stood at 5.8% year on year in September).
The SARB governor pointed out that the risk of higher inflation had increased since the last MPC meeting because of the weaker rand, which has lost 22% against the US dollar since the start of the year. He also noted that the decline in exports has led to a considerably lower estimate for third quarter growth. The central bank said that it expected to reach its inflation target of 3%-6% by the end of 2002, as measured by CPIX.
The rand reached a new all-time low of R9.74/$ this week, but managed to claw itself back to trade around the R9.63/$ level on Thursday afternoon. The rand was seen making a possible technical move to R9.60/$, where analysts expect it could face stiff resistance. The rand strengthened on news that Argentine governors had signed a key tax deal aimed at saving cash in the face of a possible debt default. This move was seen as boosting confidence in risky emerging market assets.
The South African debt markets were expecting a 50bp rate cut and shortly after the announcement from the central bank bonds reversed some of their recent gains. The benchmark R150 closed at a yield of 9.442% on Wednesday and was trading about 10bp weaker shortly after the announcement, while the longer dated R153 had weakened 7bp by yesterday (Thursday) afternoon.
Looking forward, Statistics South Africa will be releasing inflation figures next Tuesday. Economists are predicting a marginal increase in all the CPI measures, except core CPI, for which they expect a slight reduction in the year on year figure.