SA’s dollar bonds to rise more on Ukraine crisis

Russian army trucks are shipped by train near the Crimean city of Simferopol on Tuesday. South African dollar bonds have attracted inflows since the crisis in Ukraine started. Photo: Reuters

Russian army trucks are shipped by train near the Crimean city of Simferopol on Tuesday. South African dollar bonds have attracted inflows since the crisis in Ukraine started. Photo: Reuters

Published Apr 3, 2014

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The crisis in Ukraine looks likely to power more gains by South Africa’s dollar-denominated bonds, after investors fleeing the central European turmoil drove the securities to their best quarterly performance in almost two years.

South Africa’s sovereign debt denominated in dollars earned 3.9 percent in the first quarter, the most since the second quarter of 2012, Bloomberg data show. The returns surpassed the 3.6 percent average gain of 55 developing markets. The yield premium investors demand to hold the bonds rather than US treasuries fell to a nine-month low on Tuesday.

While Nato pledged on Tuesday to shore up the alliance’s eastern defences as Russia gave no signs of pulling troops back from Ukraine’s borders, the crisis had prompted some investors to seek less risky destinations for their cash, Morten Groth, a portfolio manager at Jyske Bank in Denmark, said. South Africa, which had relatively low foreign debt, a stable government and an economy showing signs of a recovery, was a safer bet, he said.

“We have seen some money leaving that region because of the Russian situation, and South Africa has definitely been one of the countries that benefited,” Groth said.

The rally should persist, though “not at the same speed”.

The US and EU imposed asset freezes and travel bans on Russian and Ukrainian officials after President Vladimir Putin’s takeover of the Crimea region and the massing of troops on the country’s border.

Investors have pulled $4.03bn from Russian equities and bonds this year, data compiled by EPFR Global show.

By contrast, inflows into South African bonds and stocks have surged to R13.3bn since the beginning of February following outflows of R28bn in January, according to Bloomberg calculations based on JSE data.

Yields on South Africa’s $1.5bn of bonds due in January 2024 dropped 46 basis points from the start of the year to 4.75 percent on Tuesday, compared with a 28-point increase to 4.91 percent for comparable Russian securities.

The yield premium for South African dollar-denominated debt over US treasuries narrowed 25 basis points in the same period, while the spread for Russia widened 56 points to 2.64 percentage points, JPMorgan Chase indices show.

Higher-than-forecast tax revenue and underspending by some government departments allowed Finance Minister Pravin Gordhan to cut his targets for the fiscal shortfall over the next three years, averting the immediate threat of a credit downgrade for Africa’s biggest economy and bolstering investor confidence.

Standard & Poor’s and Moody’s Investors Service have kept South Africa’s credit rating on a negative outlook since downgrading it in 2012. Fitch Ratings, which cut the country’s rating in January last year, has a stable outlook.

South Africa posted its third trade surplus in four months in February as a weaker rand stoked exports and curtailed imports. An improvement in the trade balance would help narrow the nation’s current account deficit, which the National Treasury forecasts will contract to 5.9 percent of gross domestic product this year from 6.1 percent last year.

“We’ve seen some fiscal consolidation and stability, and on the trade side the latest data isn’t looking too bad,” Mohammed Nalla, the head of strategic research at Nedbank Group, said on Tuesday.

The cost of insuring South Africa’s dollar debt against default for five years using credit default swaps dropped 9 basis points from the beginning of the year to 203 on Tuesday, while contracts for Russia soared 74 basis points to 239.

The rand was bid at R10.6155 to the dollar at 5pm yesterday, down 5.24c from a day earlier.

While Reserve Bank governor Gill Marcus raised the key repurchase rate by 50 basis points to 5.5 percent in January, the monetary policy committee kept borrowing costs unchanged at its meeting last week. That helped bolster confidence that higher interest rates would not stymie the economic recovery, Nalla said.

“Countries where they’ve hiked aggressively, like Brazil, have experienced a significant impact on growth, and therefore on revenue, and that becomes a credit risk,” Nalla said. “That scenario hasn’t played out here.”– Bloomberg

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