Markets Show Little Concern About South Africa Credit Downgrade

JOHANNESBURG (Capital Markets in Africa) – South Africa’s shrinking risk premia are a sign that investors are increasingly pricing out the chances of a credit downgrade for Africa’s most industrialized economy.

Benchmark bond yields, credit default swaps and the nation’s sovereign spread have all declined to multi-month lows, even after Finance Minister Tito Mbowenisaid in October that government debt would peak two years later and at a higher level than previously forecast. But with emerging markets on a roll since the Federal Reserve’s dovish tilt, South Africa’s political and fiscal challenges seem to be priced in.

Mboweni’s budget speech on Feb. 20 will be the next key risk for the sovereign credit rating, said Annabel Bishop, the Johannesburg-based chief economist at Investec Bank Ltd. Of the top three rating companies, only Moody’s Investors Service assesses South Africa at investment grade — and then only one step above junk. Moody’s is scheduled to review its stance on March 29.

The cost of insuring the government’s debt against default for five years using credit default swaps has declined to the lowest level since June. At 175 basis points, it’s in line with the emerging-market average for the first time since August. This means markets are discounting local events as potential upsets in South Africa’s trajectory.

The sovereign spread has dropped 88 basis points to 290 since the beginning of the year to the lowest level since August on a closing basis, according to JPMorgan Chase & Co. indexes. The emerging-market premium decreased 64 basis points in the same period. South Africa’s sovereign spread is now closer to the emerging-market investment-grade sovereign spread, at 175 basis points, than to the high-yield average, at 529.

Yields on local-currency bonds due December 2026 are close to discounting a credit downgrade, according to Nedbank analysts Reezwana Sumad and Walter de Wet. At 8.3 percent, the benchmark bond would reflect little to no downgrade risk, and at 9.4 percent it would reflect the opposite. The yield is now around the level it was before Fitch Rating and S&P Global Ratings cut South Africa to junk in April 2017.

Source: Bloomberg Business News