South African Yield Closing in on Turkey Shows Downgrade Fears

JOHANNESBURG (Capital Markets in Africa) – The shrinking yield discount on South African dollar bonds relative to Turkish debt is a sign investors are pricing in another credit downgrade for Africa’s biggest economy, according to Standard Bank Group Ltd.

The 10-year spread has narrowed to 19 basis points, from 120 basis points in January. While Turkey’s yield has dropped amid demand for emerging-market assets, South Africa’s tracked sideways as political and fiscal challenges mount. 

“The compression in the spread between South Africa and Turkey implies that the bond market is pricing a fair chance of further downgrades for South Africa,” Standard Bank strategists led by Walter de Wet said in a report. “Any further spread compression would signal rising expectations for downgrades.”

Moody’s Investors Service and S&P Global Ratings are reviewing South Africa’s credit ratings next month. S&P cut the foreign-currency debt to junk along with Fitch Ratings in April, and Moody’s is just one step behind, with a negative outlook on its Baa3 assessment. Turkey’s debt has similar ratings from S&P and Fitch, though Moody’s assesses it one level lower.

The key risk ahead is Finance Minister Malusi Gigaba’s medium-term budget policy statement on Oct. 25, with rating companies looking for any sign of fiscal slippage, the strategists said. Revenue collection this year has fallen short of targets, suggesting the budget deficit is set to widen, Standard Bank analysts wrote in a separate report.

Source: Bloomberg Business News