Cape Town - South African bonds face the risk of a sell-off by foreign investors as the rand’s plunge dims the allure of the nation’s debt, according to Societe Generale SA.
The rand’s 7.8 percent fall against the dollar this year is the worst of 25 emerging markets monitored by Bloomberg.
South African 10-year yields have climbed 12 basis points this month, compared with a 13 basis-point drop for similarly-rated Mexico.
Risks for foreign investors have increased as South Africa posted a current-account deficit close to a four-year high in the fourth quarter after mining strikes and slower growth in Europe cut exports from Africa’s largest economy.
A widening shortfall requires more foreign inflows to fund imports, a source of funds that has dwindled after record 2012 purchases.
“There is trouble brewing in South African markets,” Benoit Anne, the London-based head of emerging-markets strategy at SocGen, said in an e-mailed response to questions yesterday.
“We may be getting closer to a real-money investor capitulation, the market equivalent of a volcano eruption.”
SocGen is underweight South African bonds in its Emerging- Market Optimal Local Bond Portfolio.
The nation’s debt of all maturities longer than one year has lost 7.4 percent for dollar investors this year, the third-worst, after Japan and the UK among 26 sovereign markets tracked by the European Federation of Financial Analysts Societies and Bloomberg.
Slower Buying
The rand weakened 0.2 percent to 9.1889 per dollar by 9:24 a.m. in Johannesburg.
Yields on government bonds due February 2023 were unchanged at 6.84 percent.
The yield may rise to 6.97 percent by year-end, according to the median estimate of five analysts in a Bloomberg survey.
Foreign investors have been net buyers of 13.5 billion rand ($1.5 billion) of South African bonds this year, or an average of 1.2 billion rand a week, compared with average weekly purchases of 1.8 billion in 2012, according to Bloomberg calculations based on data from the Johannesburg Stock Exchange.
The current-account gap reached 6.5 percent of gross domestic product, down from a revised 6.8 percent in the third quarter, which was the biggest shortfall since the same period in 2008, the Reserve Bank said on March 12.
The country’s relatively high interest rates may continue to attract foreign investors to the nation’s bonds, supporting a rand recovery, Bruce Donald, a currency strategist at Standard Bank Group Ltd. in Johannesburg, said in a March 18 note.
The current-account gap may narrow as the weaker rand boosts the competitiveness of South African exports, he said.
Yield Advantage
The Reserve Bank will leave its benchmark repo rate unchanged at 5 percent tomorrow, maintaining the rand’s yield advantage over the dollar, according to all 12 economists in a Bloomberg survey.
The premium investors receive for holding South African 10-year debt rather than US Treasuries has climbed seven basis points this month to 489.
The risk of forced blackouts by Eskom, the state-owned electricity company, may weaken the rand to 9.95 per dollar, Peter Attard Montalto, a London-based emerging- markets economist at Nomura International Inc., said in a note yesterday.
The currency also faces threats from labor disputes, a widening budget shortfall and a potential credit-rating downgrade, he said.
The rand fell 15 percent against the dollar in the first quarter of 2008, when coal shortages and maintenance at power plants forced Eskom to cut electricity to the nation’s mines.
South Africa’s credit outlook was kept at negative by Standard & Poor’s on March 13.
Fitch Ratings cut the debt rating one level to BBB in January, following downgrades by Moody’s Investors Service and S&P last year.
‘Fiscal Worries’
“General fiscal worries should continue to combine with growth and balance-of-payments worries to be a key and ongoing market driver,” Montalto wrote. “Our view of weakness from here is still intact.”
The cost to protect South African dollar-denominated sovereign debt against non-payment for five years using credit default swaps jumped 28 basis points this year to 171.
The swaps, which increase when risk perception deteriorates, pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower breaks debt agreements.
“While the rand has sold off aggressively for a while, so far local rates have generally lagged,” Anne at SocGen said.
“Bond selling has been fairly contained. This may change as stress continues to build up in the foreign-exchange market.” - Bloomberg News