SocGen Sees Rand Haven From Ukraine Turmoil: South Africa Credit

The turmoil in Ukraine is giving South Africa’s rand an unlikely role -- that of a refuge from the risk the crisis in eastern Europe will escalate.

“I never thought I’d say this, but South Africa has become the new safe haven in the EMEA region,” Benoit Anne, the London-based head of emerging-market strategy at Societe Generale SA, said by phone yesterday. “Look at how resilient the rand has been during these past turbulent weeks. I’m not prepared to turn bullish on the rand yet, but I don’t want to go short either.”

South Africa’s currency gained 5 percent against the dollar since the first week of February, the month clashes in Kiev led to the overthrow of President Victor Yanukovych. That’s the most among 10 emerging-market currencies in Europe, the Middle East and Africa tracked by Bloomberg. The cost of insuring the nation’s debt this month is less than that for Russia, which shares the same credit ratings, for the first time since June.

As investors brace for a Russian takeover of Ukraine’s Crimea region following a referendum on March 16, South Africa’s economy is also less at risk than regional peers because of its geographic distance from, and dearth of trade links with, Ukraine, according to Anne. Signs of improvement in the economy, including a contraction in the current-account gap, are also bolstering the rand, he said.

Back Down

President Vladimir Putin supported a request from Crimea to join Russia yesterday, defying U.S. and European Union sanctions in the worst standoff with the West since the Cold War. The move signals Putin won’t back down after the U.S. and the EU slapped Russian and Crimean officials with asset freezes and travel bans, and threatened further measures to dissuade him from taking the territory.

The crisis is adding to emerging-market volatility at a time when a reduction in Federal Reserve monetary stimulus and an economic slowdown in China are threatening growth and investment in developing nations, according to Goolam Ballim, chief economist at Standard Bank Group Ltd, Africa’s biggest lender.

The cost of insuring South Africa’s dollar debt against default for five years using credit default swaps dropped 31 basis points since Feb. 3 to 203 yesterday, while contracts for Russia soared 80 basis points to 269. Russia’s ruble has slid 2.1 percent against the dollar in the period.

No Gas

The rand weakened 0.4 percent to 10.7727 per dollar by 6:25 p.m. in Johannesburg. Yields on benchmark rand bonds due December 2026 dropped seven basis points, or 0.07 percentage point, to 8.53 percent, bringing the decrease since the beginning of February to 40 basis points.

South Africa doesn’t import natural gas from Russia or Ukraine, and its exports to those countries account for 0.2 percent of gross domestic product, according to SocGen. That’s the lowest proportion of 17 emerging and developed markets in the EMEA region. Turkey’s exports to Ukraine and Russia are equal to 1.1 percent of GDP, while for Poland it’s 3 percent and 4.3 percent for Hungary, SocGen said.

“From a trade perspective, South Africa isn’t exposed,” Ilke van Zyl, an economist at Vunani Securities Ltd., said by phone from Johannesburg yesterday. South Africa imports some wheat from Ukraine.

The rand’s gain also reflects an improvement in the current-account deficit, which contracted for the first time since 2012 in the fourth quarter.

Twin Deficits

While the shortfall narrowed to 5.1 percent of GDP from 6.4 percent, a strike in the platinum industry since Jan. 23 and power outages may hurt exports in the first quarter.

The rand needs to depreciate about 10 percent to bring the current-account deficit to a sustainable level, UBS AG said in a report this month. Foreign investors have pulled 14.1 billion rand ($1.3 billion) from South Africa’s bond market this year as the Fed tapered monetary stimulus, increasing competition for investment.

The current-account deficit together with a fiscal gap leave South Africa vulnerable to external shocks, Standard Bank’s Ballim told reporters in Cape Town yesterday. The threat of capital outflows from emerging markets in the wake of the Ukraine crisis should cause “a healthy degree of anxiety,” he said.

Impenetrable Armor

“During stress times, all emerging markets tend to suffer, and this is a stress situation,” Ballim said. “We’re not insulated with impenetrable armor.”

Investor expectation of higher interest rates following a 50 basis-point increase in the benchmark to 5.5 percent in January would bolster the rand amid emerging markets concern, said Nicholas Spiro, managing director of Spiro Sovereign Strategy.

Forward-rate agreements are pricing in another 166 basis points of rate increases over the next 12 months, according to data compiled by Bloomberg.

“Emerging Europe is now very much the focal point of market anxieties,” Spiro said by phone from London on March 17. “The rand looks and feels more insulated now. Right now there are several currencies that are more vulnerable.”

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