A surprise economic recession has brought a sharp focus on South Africa’s shrinking revenue and mounting debt pile and could intensify a bond sell-off at a time the assets are reeling from nervousness over Turkey’s economic woes.
Investors have dumped South African bonds since August as an emerging markets sell-off picked up pace driven by concerns over the Turkish central bank’s ability to rein in double-digit inflation, which has surged to nearly 18%.
The bonds had in July bounced back from a record sell-off in June, as investors opted to pick up the high return on offer.
But news that Africa’s most industrialised economy had entered a recession sent the currency and bonds tumbling, wiping away the optimism that followed the entry in February of President Cyril Ramaphosa and finance minister Nhlanhla Nene.
South Africa’s slide into recession for the first time since 2009https://www.moneyweb.co.za/news/markets/the-tide-is-out-and-sa-is-exposed/ is a blow to Ramaphosa, who has talked up his plans of an economical revival after nine years of stagnation under former president Jacob Zuma.
The rand fell 5% and yields on local currency and foreign bonds soared in response to news of the recession.
“All things being equal bonds yielding above 9% should be attractive, but we’re really concerned about the impact of the GDP data on the deficits,” said Ruen Naidu, head of multi assets at Argon Assets.
The recession could also draw the attention of ratings agencies, who have South Africa’s sovereign ratings near “junk” status.
“Minister Nhlanhla Nene has very limited options. He has to deliver consolidation in the October budget or risk being downgraded by Moody’s,” co-head of fixed income at Investec Nazmeera Moola, said.
Pretoria is running a large budget deficit at 4.3% of GDP and has seen public debt levels rocket over the past decade from around 20% of growth to more than 50%, levels that drew warnings from ratings agencies.
With the dismal growth path set to trump concerns over inflation, the central bank could be forced to hold lending rates, removing another factor that made South Africa’s bonds sought after among emerging markets.
After heavily pricing in interest rate hikes last month, forward markets have trimmed those bets significantly. Analysts expect South African bonds to be in demand only later this year.
“We believe that once the threat of a ratings downgrade and the medium-term budget statement has passed in October there might be an opportunity to buy ZAR assets,” said Christopher Shiells, senior emerging market analyst at Informa Global Markets.