SA sets precedent in bond market

‘Sovereign spread’ has widened 95 basis points this year

SOUTH Africa just set a precedent in the bond market.

As yields on government debt rise, the premium investors demand to hold the country’s securities instead of US treasuries, a measure of the perceived investment risk, surpassed that of the average for its emerging-market peers for the first time.

The nation’s so-called sovereign spread has widened 95 basis points this year to reach 507 points on Friday, more than the 503 average of its emergingmarket peers, JPMorgan Chase indexes show.

That is the first time it has happened since records started in January 1998.

The rand has slumped 31 percent against the dollar since the beginning of 2015 as commodity prices tumbled amid slowing growth in China, South Africa’s biggest trading partner. The currency dropped to a record last month after President Jacob Zuma fired his finance minister, raising concern the government would not stick to fiscal targets already under pressure from an economy that narrowly avoided a recession in the third quarter.

“We have a combination of domestic uncertainty, which is home grown by Zuma, and at the same time the international environment is not great,” Nigel Rendell, a senior emerging-markets analyst at Medley Global Advisors, said.

“I don’t think there are a lot of people that are particularly optimistic about South African investments or bonds in particular.”

Yields on South Africa’s $2 billion (R33bn) of securities maturing in September 2025 jumped 55 basis points on December 9 after Zuma fired Nhlanhla Nene and replaced him with little-known MP, Desmond van Rooyen.

He reconsidered four days later, replacing Van Rooyen with Pravin Gordhan, who had held the position for five years through 2014.

While markets rallied, the relief proved temporary, with the rand and bond yields reaching new records this month as the worst drought in more than 100 years added to pressures on the economy while rising rates in the US drew capital away from emerging markets.

Yields on South Africa’s 2025 notes climbed 2 basis points yesterday to 5.94 percent, the highest on a closing basis on record. The rand was little changed at R16.8013 per dollar, bringing its decline this year to 7.9 percent.

Rising inflation risks may force the central bank to take more aggressive action in tightening policy at a time when the economy is barely growing.

Worsening debt levels and the threat of credit rating downgrades mean Gordhan has limited room to veer from his budget targets by boosting spending. The central bank projects the economy expanded 1.4 percent last year, the slowest pace since the 2009 recession.

Standard & Poor’s cut the outlook on South Africa’s BBBcredit rating to negative from stable last month, indicating it may downgrade the nation’s debt to junk. Fitch Ratings has an equivalent rating of BBBwith a stable outlook, while Moody’s rates debt one level higher at Baa2 rating. “People are still worried about where is policy going in South Africa,” Rendell said. – Bloomberg