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How vulnerable is SA?

Emerging markets face several headwinds.

Over the last few months, emerging markets have faced headwinds in the form of tighter monetary policy in the US, renewed dollar strength, lower global economic growth, ongoing trade tension, a higher oil price and political uncertainty.

As global financial conditions tighten, country differentiation will be a key consideration for foreign investors, Dr Hendrik Nel, head of the financial stability department at the South African Reserve Bank (Sarb), said at the South African Institute of Financial Markets Regulatory Summit on Wednesday (August 8). Investors will likely favour emerging markets with relatively favourable metrics and turn away from countries with a heavy reliance on external financing, high rates of foreign ownership of domestic bonds, high and rising levels of US dollar-denominated debt (especially of a short-term nature), significant twin deficits and rising debt levels. 

This raises the question: how vulnerable is South Africa, especially in light of its reliance on foreign capital? How does it compare to its emerging market peers?

The graph below shows the Institute of International Finance’s (IIF’s) emerging market scorecard, which measures how exposed emerging markets are to the US (especially in terms of debt), whether they have large deficits that must be financed and whether their assets are fairly valued. A level below zero highlights areas of concern.

Sources: IIF & Sarb

Nel says this highlights some areas of vulnerability. South Africa must finance twin deficits, its foreign exchange reserves are fairly low and there are various challenges at state-owned enterprises.

But there are also some positives.

South Africa does not have a high level of foreign denominated debt and its assets are fairly valued.

“It puts us amongst countries such as Ukraine, China, Argentina, Turkey, and others,” says Nel.

One potential challenge facing South Africa is the foreign ownership of assets. Foreign holdings of domestic local currency (rand-denominated) bonds is the highest among emerging markets at 41%.

Sources: JSE, Strate & Sarb

Nel says that in the case of a serious event like a downgrade, foreigners may be forced to sell bonds and South Africa may see quick outflows. However, local investors have surplus capacity to buy more South African bonds, which means there will be willing buyers locally to take up rand-denominated bonds in the event of a sell-off by foreigners.

The stability of the foreign investor group is also an important consideration, says Nel.

This would depend on a country’s credit rating. Countries with an investment grade rating will attract more stable investors than non-investment grade countries.

“At the moment we are investment-grade-rated by one rating agency [Moody’s] and non-investment by two others [S&P and Fitch], so it is a bit of a mix, but as long as you attract a stable investment group, 41% foreign ownership is not a risk,” says Nel.

“And when we market these bonds on roadshows, obviously we want the foreigners to buy it. We want them to invest in our economy, but then we must add that it could present a risk as well.”

An area where South Africa compares favourably to other emerging markets is its exposure to corporate US dollar debt as a percentage of its total external debt, which is relatively low at around 16%. Moreover, very few of these payments are due in the short term.



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Investors and common sense. Visitors, on holiday,from the U.S/E.U, are watching the exchange rate. While admiring the country, they pass local banks, offering dream deposit rates. They do a backtrack of the Rand history online, and bingo, a new investor is born!

A very interesting article as the foreign holders of our debt can sell very quickly. I agree that local investors (Read mainly SA Pension funds who have the eight highest assets in the world measure in dollars and 5th largest in size of GDP) will buy local bonds. Problem is then that the risk profile of local funds will change and any no performance will wipe out one of the best and highest assets bases in the world! We have to become better at exposing government faults.

South Africans do not yet understand the risk to their pensions and quite possibly their lives of a government that gets this “money hungry”

Thanks, good article!

Understanding the risk to our pensions is one thing. Having other options quite another, with the Reg 28 limits w.r.t. offshore investment.

Money hungry is one thing, another is money hungry while practising rampant corruption. That’s unsustainable.

Cyril has been such a disappointment, bar a few important things that he should be given credit for.

He’s pulling a Zuma on us, where he preaches to the audience, whomever they are at the time.

Just wish he could play it 30:70 politics and economics, as appose to the other way around.

Agree – its because Cyril has a very tenuous hold on NEC. He only won the ANC leadership by 140-odd votes. He has to please wide and diverse interest groups in the ANC; he cannot be seen to be too anti-Zuma. He is all talk on corruption but is too scared to do anything…
…possibly, he will wait for a mandate from the voters in 2019!??
We have seen it from 1994 onwards; the ANC puts itself first and the country second. It hasn’t transitioned from a Freedom Fighting movement to a governing party – pity!?

How vulnerable? We may just find out in the next few weeks as the Turkey crisis unfolds and the contagion risk spreads.

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