Budget-to-Rating Risks Fail to Dent South African Bond Haven Bid

JOHANNESBURG (Capital Markets in Africa) – Investors are chasing South African dollar bonds as the flight to safety sparked by the spread of the coronavirus eclipses the country’s idiosyncratic risks, including a key budget this week and the possibility of a credit downgrade to junk soon after.

While the rand and local-currency bonds lost ground on Monday amid a global risk selloff, yields on South Africa’s hard-currency bonds held near multi-month lows, tracking the plunge in U.S. Treasury rates as investors flocked to perceived havens.

“The strong bid for safe-haven assets is providing welcome support to emerging-market fixed income as external debt continues to perform strongly,” Guillaume Tresca, a Paris-based senior strategist at Credit Agricole SA, said in a note to clients. “It should continue to be favored over local debt given the resilience of the dollar and the weakening of emerging-market currencies.”

Finance Minister Tito Mboweni has to convince ratings companies and investors on Wednesday that he has a credible plan to curb government debt and rescue ailing state-owned companies including Eskom Holdings SOC Ltd., the electricity utility.

Moody’s Investors Service, the only major rating company that still grades South Africa’s debt at the investment level, is reviewing the assessment in March. A downgrade to junk would result in the removal of the country’s bonds from indexes that track investment-grade debt.

Of 19 economists surveyed by Bloomberg this month, 14 expect Moody’s to downgrade the country to junk this year, and nine of those say it will happen in the first half. The rating company cut the outlook on the nation’s assessment to negative in November and said it would look to the Feb. 26 budget for a feasible government strategy to contain the country’s rising debt.

Yields on South Africa’s $3 billion of 2049 Eurobonds were little changed on Monday at 5.675% after falling 12 basis points in the past two weeks. By contrast, yields on benchmark 2030 government rand bonds climbed six basis points on Monday to 8.88%, while the rand weakened 0.9% and the benchmark stock index slumped 3.5%.