South Africa’s credit risk is rising relative to emerging-market peers on investor concern the nation may get downgraded as economic growth sputters and borrowing costs increase.
Investors are paying 1.05 percentage points more to insure the country’s debt against non-payment for five years using credit default swaps than for similarly rated Mexico, up 35 basis points in the fourth quarter, data compiled by Bloomberg show. South Africa’s default swaps are the fourth-highest among 25 emerging and major markets monitored by Bloomberg.
Bond yields have jumped since May, when the Federal Reserve first said it may reduce monetary stimulus, boosting borrowing costs at a time when South African Finance Minister Pravin Gordhan is struggling to contain the budget deficit in the face of slumping tax revenue. Moody’s Investors Service and Standard & Poor’s have a negative outlook on the nation’s debt.
“That risk of a credit downgrade is still there,” Asher Lipson, a fixed-income strategist at Standard Bank Group Ltd. in Johannesburg, said by phone yesterday. “There is also concern that tapering will trigger more general worries.”
The Fed may begin reducing its $85 billion monthly bond-buying program after a two-day meeting which ends today, according to 34 percent of economists in a Dec. 6 Bloomberg survey, up from 17 percent in a Nov. 8 poll.
South Africa has been rocked by strikes since last year that have shut mines and car plants, undermining growth in an economy that’s set to expand at its slowest pace since the 2009 recession. The rand’s 18 percent plunge against the dollar this year, the worst out of 16 major currencies tracked by Bloomberg, is threatening to fuel inflation, reducing the central bank’s room to stimulate the economy.
The rand traded at 10.3298 per dollar as of 5:35 p.m. in Johannesburg, little changed from yesterday. Yields on 10-year government bonds rose one basis point, or 0.01 percentage point, to 7.85 percent, bringing the increase since May 22 to 139 basis points.
In October, Gordhan forecast the budget gap will narrow to 4.1 percent of gross domestic product in the year through March 2015, from 4.2 percent this fiscal year. Growth is forecast to slow to 2.1 percent this year from 2.5 percent in 2012, according to National Treasury estimates.
South Africa relies on foreign investment in bonds and stocks to plug its current-account deficit, which widened to 6.8 percent of GDP in the third quarter. Those flows are drying up as investors anticipate a reduction in stimulus from the Fed.
“Tapering was the major market talking point globally,” John Cairns, a currency strategist at Rand Merchant Bank in Johannesburg, said in an e-mailed note on Dec. 13. “Locally we had to worry about what such a move would do to inflows even as the country is running such a large current-account deficit. This concern added to rand weakness but had a much larger effect on the bond market.”
Foreign investors have sold a net 17.1 billion rand ($1.65 billion) of South African bonds since the beginning of November, cutting inflows this year to 25.7 billion rand. That’s short of the average 19.5 billion a month needed to fund the current-account shortfall, according to Standard Bank estimates.
Moody’s cut South Africa’s credit rating last year to Baa1, the third-lowest investment grade and on par with Mexico and Russia. That was followed by similar actions by S&P and Fitch Ratings.
Price on credit default swaps have fallen from a four-year high of 264 on June 24, suggesting investors are less concerned about tapering now than they were in May and looking forward to how the government will manage its finances in 2014, said Mohammed Nalla, head of strategic research at Nedbank Group Ltd. The contracts were unchanged yesterday at 195 basis points.
“Now that the rand seems to have stabilized, investors will be taking a more sober look at the fiscal situation,” Nalla said by phone from Cape Town yesterday. “They’ll be taking a very close look at the February budget. They’ll be looking at whether Minister Gordhan successfully reduces the fiscal deficit, and also at what he is going to do with the revenue mix.”