South Africa’s worst fiscal bind in 15 years is prompting investors to consider the country almost as risky as junk-rated Russia.
The cost of insuring against a default by the government of Africa’s second-biggest economy narrowed on Monday to 14 basis points less than similar protection for Russia, which is tackling a recession, involvement in two conflicts and international sanctions linked to the fighting in Ukraine. The difference was 417 basis points in February.
Against a deteriorating economic backdrop, President Jacob Zuma’s administration is struggling to stick to a pledge to keep debt to less than 50% of gross domestic product. Interest payments on debt are growing faster than any other expenditure item, accounting for almost 10% of government spending, while a slowdown in demand from China, the nation’s biggest trade partner, is compounding the country’s challenges along with a drought, a slump in commodity prices and electricity shortages.
“We have growth that’s so weak it’s very difficult to see how South Africa will pull itself out of some of the longer-term concerns,” Nigel Rendell, a senior analyst for Europe, Middle East and Africa at Medley Global Advisors, said by phone from London. “The difference is, in Russia, all the bad news is probably in the price.”
Five-year credit-default swaps on South African debt, which investors use to insure against non-payment for the period, have risen 84 basis points to 275 this year, according to data compiled by Bloomberg. Russia’s have dropped 188 basis points to 287. South Africa hasn’t been deemed riskier than Russia since July 2014.
The worst may be over for Russia as the economy contracted at a slower pace in the previous quarter, while inflation is easing from a 13-year high. That’s raising the likelihood that the central bank may cut interest rates if prices fall in line with its estimates.
South Africa’s debt as a percentage of GDP will be more than twice that of Russia and remain so through 2020, according to the International Monetary Fund. Still, that compares to debt levels of 99% for Spain, more than double South Africa’s projected 2015 level of indebtedness. Moody’s Investors Service and Fitch Ratings rate South Africa at the second-lowest investment grade, and Standard & Poor’s places it at the lowest. Russia has the highest junk grade from Moody’s and S&P, with Fitch placing it at the lowest investment rating.
“The problem with South Africa is there aren’t any bright spots,” Rendell said. Fiscal consolidation “always seems within reach and then just as you try to get there, it jumps another couple of years into the future.”