Registered users can save articles to their personal articles list. Login here or sign up here

Violence adding to credit risk amid South Africa’s power crisis

SA’s credit risk is climbing relative to emerging-market peers.

South Africa’s credit risk is climbing relative to emerging-market peers after a wave of violence against foreigners soured investor sentiment already dimmed by power shortages, according to Nedbank Group.

Credit-default swaps to protect against non-payment of South Africa’s dollar debt over the next five years climbed 17 basis points this year to 206, compared with a two-point rise to 141 for Colombia, which has a similar Baa2 credit rating at Moody’s Investors Service. The average for 10 developing nations in the Markit CDX Emerging Markets Index is 91.

At least seven people have died since March 30 in the eastern port city of Durban, Johannesburg and other towns as South Africans attacked foreigners they accused of taking jobs and business opportunities. While the government said last week violence against foreigners had ended, the clashes focused attention on South Africa’s economic shortcomings at a time when Eskom Holdings SOC Ltd., the national power utility, is rationing electricity and thereby constraining production and economic growth.

“South Africa’s CDS spreads have widened quite substantially and they’re underperforming emerging-market peers,” Robert Price, a market analyst at ETM Analytics, said by phone from Johannesburg on April 30. “That’s a reflection of global market sentiment regarding South African risks. Eskom and those xenophobic attacks have had an impact there.”

 

Asylum Seekers

 

The last major anti-immigrant attacks flared up in 2008, leaving about 60 people dead and 50,000 displaced. In January, five deaths were recorded in a country that hosts about 65,000 refugees and 295,000 asylum seekers, and has 1.7 million immigrants, according to the 2011 census. A fifth of the South African population of 54 million live on less than R335 ($28) a month and 24% of the workforce are without jobs.

Africa’s most-industrialized economy expanded 1.5% last year, the slowest pace since a 2009 recession, and will probably grow 2% this year, according to government estimates. Manufacturing output, which makes up about 13% of the economy, contracted 0.5% in February from a year earlier as a power shortage forced Eskom to cut supply.

“Investors worry about South Africa over the longer term because some of these issues are very deeply rooted,” Nigel Rendell, a senior analyst at Medley Global Advisors, said by phone from London. “Growth is soft. It’s not going to do anything to ease any of the longer-term tensions about social policy or poverty.”

 

Aging Plants

 

Eskom, which supplies about 95% of the nation’s electricity, is rationing supply because its aging plants can’t meet demand. Dawie Roodt, chief economist of Efficient Group Ltd. in Pretoria, estimates the electricity crunch since 2007 has cost the economy more than R300bn ($25 billion) in lost output.

“South Africa has experienced negative media coverage regarding a surge in violent activity, along with the worsening electricity situation,” Mohammed Nalla, head of strategic research at Nedbank Group Ltd., said in a client note on April 29. “These factors have also played a hand in hampering sentiment towards the local markets. This is evident in the trajectory of South Africa’s CDS spreads.”

Yields on benchmark South African government rand bonds due December 2026 climbed 16 basis points in April to 7.96%.

The violence against foreigners has sparked condemnation from governments including Ghana and Malawi, protests in Nigeria and Zimbabwe and calls from continental groups, such as the African Union, for South Africa to act decisively to stem the attacks. Security forces will ensure there is no recurrence, Jeff Radebe, a minister in the presidency, said on April 28 after the nation deployed the army in townships around Durban and Johannesburg.

“All of these problems are almost symptomatic of something deeper and underlying with regards to economic policy in South Africa,” Price at ETM said. “A major driver of these xenophobic attacks are down to the economy itself. We are going to continue to see these little fractures appearing quarter after quarter until we see a change for the better in economic policy.”

©2015 Bloomberg News

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.

COMMENTS   1

To comment, you must be registered and logged in.

LOGIN HERE

Don't have an account?
Sign up for FREE

“We are going to continue to see these little fractures appearing ….until we see a change for the better in economic policy”

Economic POLICY is currently terrific and enjoys global applaud by the World Bank and other parties that matter. Policy is known as the National Development Plan. Problem is powerful trade unions do all they can to scupper implementation through relentless violent strikes (even at the new power stations being built) and key institutions of law and order are in disarray.

End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR
Insider GOLD
ONLY R63pm

Moneyweb's premium subscription is a membership service which will give you access to a number of tools to take charge of your investments.
Or choose a yearly subscription at R630pa - SAVE R126

Get instant access to all our tools and content. Monthly subscription can be suspended at any time.

Podcasts

GO TO SHOP CART

Follow us:

Search Articles:Advanced Search
Click a Company:
server: 172.17.0.2