Credit markets are punishing South Africa for the deadliest mine violence since the fall of apartheid as the cost of insuring the nation’s debt turns from being the cheapest to the most expensive among its peers.
Credit default swaps over five years have jumped 36 basis points since reaching a 14-month low on August 7, nine days before police killed 34 striking miners at Lonmin’s Marikana mine.
The contracts are higher than those of Indonesia, Russia, Turkey and Brazil. Before the violence, South Africa’s swaps were the lowest of the group.
“We can’t deny that August 16 was damaging for South Africa,” Finance Minister Pravin Gordhan said on Monday. “We need to get our act together as South Africans and restore confidence.”
The upheaval, which spread from Lonmin to other platinum, gold and iron ore mines, would cut 0.5 percentage points off gross domestic product (GDP) growth this year and cut exports by more than R12.5 billion, the National Treasury said. Mining, which accounts for 6 percent of GDP and employs almost half a million people, would take a year to recover from job losses from the strikes, Gordhan said.
Slowing growth and widening inequality sparked the first downgrades since 1994, with Moody’s Investors Service and Standard & Poor’s (S&P) lowering the nation’s credit ratings. Fitch Ratings, which has South Africa on a negative outlook, will give its review of the country next year.
Mining “will likely remain a drag on GDP growth”, Standard Bank strategist Bruce Donald said on Thursday. “The labour unrest is an integral part of this equation.”
The economy expanded the least since the 2009 recession in the third quarter, with growth slowing to an annualised 1.2 percent from the previous three months, when it grew a revised 3.4 percent. The Treasury estimates growth will slow to 2.5 percent this year from 3.5 percent last year.
Five-year credit default swaps rose to 158 basis points yesterday from 122 on August 7
South Africa’s investment-grade BBB rating at S&P is similar to Brazil and Russia, two levels higher than Indonesia and three levels above Turkey.
Foreign investors have bought a net R91.7bn of South African bonds so far in 2012, the most since at least 1990, data from stock exchange operator JSE Limited show.
The purchases have helped to hold yields near record lows.
Demand for the debt was boosted by the nation’s inclusion in Citigroup’s World Government Bond index (WGBI) on October 1, which is tracked by investors managing as much as $3 trillion (R26.2 trillion).
WGBI-fuelled demand masked negative investor sentiment, said Lars Peter Nielsen at Global Evolution.
“A lot of the inflows since April were based on that specific event, with passive investors buying bonds because of that,” Nielsen said last week. “That might give you a false picture of investors’ views on South Africa and the risk in South Africa.”
The rand has weakened 8.3 percent against the dollar this year, the worst after Brazil’s real, of 16 major currencies tracked by Bloomberg. The currency gained 10.5c to be bid at R8.7681 to the dollar at 5pm yesterday.
South African yields were high enough to compensate investors for risks, Denise Prime at GAM International Management said yesterday. Yields might fall as investors in developed markets, where interest rates were near zero, looked elsewhere for returns, she said.
“The search for yield is going to continue as long as global rates remain low,” Prime said last week. “Interest returned to South Africa as we started to see a stabilisation in the labour issues that had been dominating the headlines.”
The premium that investors demand to hold South African 10-year bonds rather than similar-maturity US Treasuries widened 36 basis points to 552 on Wednesday since falling to a one-year low on September 28. The spread was as high as 565 basis points on October 9.
Unrest at the nation’s mines largely ended after Anglo American Platinum reached a pay deal two weeks ago.
Meanwhile the ANC will be meeting for four days starting December 16 to elect its leaders.
Gordhan said the government had initiated talks with labour unions and mining companies about employment conditions, and deserved credit for sticking to its fiscal targets.
“When times are good, everyone is nice to you but when you have this sort of dent, the fragility of that confidence begins to be demonstrated,” Gordhan said. “The ANC’s leadership is very aware that it needs to move onto a new trajectory and sustain its credibility both in South Africa and abroad.” - Bloomberg