South Africa\u2019s rand is most vulnerable to the rise in US Treasury rates among its emerging-market peers, according to Morgan Stanley, which predicts further weakness for the battered currency as the country\u2019s finances deteriorate.<\/p>\n
The rand may decline about 6% to R15.50 per dollar in the run-up to the medium-term budget statement on 24 October, Morgan Stanley strategists including Min Dai wrote in a report.<\/p>\n
Investors will watch the budget update for signs of fiscal slippage as sluggish economic growth curbs tax revenue.<\/p>\n
“We remain convinced that South Africa will underperform into the medium-term budget update,” the strategists said.<\/p>\n
With foreign investors holding about 40% of the government\u2019s rand-denominated bonds, “we believe that South Africa is the most vulnerable country in the current environment,” they wrote.<\/p>\n
The rand slumped 2% on Wednesday as 10-year US Treasury yields climbed to the highest level since 2011, attracting money to the dollar and damping appetite for riskier assets.<\/p>\n
The currency extended its decline on Thursday, weakening 0.5% to R14.71 per dollar by 14:37 in Johannesburg. The probability of the rand hitting R15.50 by 24 October is 25%, according to Bloomberg\u2019s forecast model.<\/p>\n
Foreign investors have sold a net R55.7 billion ($3.8 billion) of South African bonds this year, according to JSE data, with the sell-off gathering momentum since the beginning of the second quarter.<\/p>\n