Russia Haven Play Fizzles as Rand Hits Wall: South Africa Credit

South Africa’s status as a refuge from the deepening crisis between Russia and Ukraine is fading as foreign demand for rand bonds fizzles, marking an end to the currency’s best rally in two years.

Foreign investment in South African debt fell 42 percent in April from March, sending the rand to its first monthly decline since January, according to data compiled by the Johannesburg Stock Exchange and Bloomberg. Yields on local-currency bonds due December 2026 climbed nine basis points in the period, the fourth-biggest jump among 23 emerging markets monitored by Bloomberg. Yields on Turkish debt fell 49 basis points.

While the stand-off between Russia, and the U.S. and its European allies over Ukraine is damping demand for assets from developing nations, investors are also growing increasingly wary as South Africa approaches a general election next week amid worsening labor relations, slowing growth and high unemployment. Emerging-market local bond funds had outflows in the week through April 23 compared with inflows the week before, according to Standard Chartered Plc, citing EPFR data.

“It’s risk-off, and the safe haven is once again the mighty dollar,” Ian Cruickshanks, chief economist at the South African Institute for Race Relations, a Johannesburg-based policy research institute, said by phone yesterday. “You also have pre-election jitters and a domestic economic outlook that isn’t rosy. The rand is going to stay under pressure.”

Extending Drop

The rand weakened 0.4 percent in April after advancing 5.3 percent the prior two months, the most in a similar period since February 2012. It may extend the drop to 10.93 per dollar by the end of second quarter, according to the median estimate of 26 economists in a Bloomberg survey.

Foreign investors sold 1.5 billion rand ($142 million) of South African bonds last week, cutting inflows for the month to 4.1 billion rand from 7.1 billion rand in March, according to JSE data. Yields on 12-year debt were at 8.46 percent yesterday, compared with rates on U.S. Treasuries due November 2026 of 2.89 percent. The rand strengthened less than 0.1 percent to 10.5518 per dollar by 11:17 a.m. in Johannesburg.

The setback for emerging-market debt may be temporary as high yields attract investors, Benoit Anne, the London-based head of emerging-market strategy at Societe Generale SA, said in an April 28 note. SocGen recommends buying South African and Mexican bonds.

Slowing Growth

Economic growth in South Africa, which has an unemployment rate of 24.1 percent, slowed to 1.9 percent last year from 3.5 percent in 2012. More than 70,000 workers at some of the nation’s platinum mines have been on strike since Jan. 23, crippling output in the world’s biggest producer.

“The underlying trend remains for rand losses as the emerging-market bond selloff continues,” John Cairns, head of foreign-exchange strategy at Rand Merchant Bank in Johannesburg, said in a note yesterday. “The risk of extreme rand moves is high.”

To contact the reporter on this story: Robert Brand in Cape Town at rbrand9@bloomberg.net

To contact the editors responsible for this story: Vernon Wessels at vwessels@bloomberg.net Emily Bowers

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