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.”
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.”
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.”
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