Investors see SA as riskier than Russia

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Mike Cohen

South Africa’s perceived credit risk among investors is eclipsing that of Russia’s as labour unrest weighs on growth in the economy.

The cost of insuring the nation’s debt against non-payment for five years using credit default swaps has risen 5 basis points to 185 since July 1, when local metalworkers began a wage strike, according to data provider CMA Group.

Contracts for similarly rated Russia fell 7 basis points in the period to about 173, as concern eased over the economic repercussions of the conflict with Ukraine.

The strike by about 220 000 members of the National Union of Metalworkers of SA began about a week after more than 70 000 platinum miners ended a five-month stoppage that caused growth to shrink 0.6 percent in the first quarter.

The economy suffered further in the next three months, with reports last week showing mining output and manufacturing slumped in May.

The nation’s creditworthiness was cut by Standard & Poor’s a month ago.

“Our growth is getting downgraded,” Abri du Plessis at Gryphon Asset Management said on Friday.

“We have seen credit downgrades and there is always a concern of the rand blowing out further. One sees the sentiment in Russia going in the opposite direction.”

Russian default swaps traded higher than their South African counterparts between March 3, the month Crimea was seized from Ukraine, and June 6. Since July 2, the South African contracts have consistently been higher, signalling greater investor concern.

Government-mediated efforts to end the metalworkers’ strike faltered on Friday, when the union rejected a revised pay offer from the Steel and Engineering Industries Federation of SA.

The employers’ lobby estimates the stoppage is costing as many as 12 000 companies R300 million a day.

“Risk in South Africa is deteriorating relative to other emerging markets,” Peter Attard Montalto, an emerging markets economist at Nomura International, said from London on Thursday.

“The credit default swaps and widening bond spreads reflect heightened concern.”

The premium investors demand to hold South African debt rather than US treasuries rose 23 basis points from a one-year low on June 9 to 222 on Friday, JPMorgan Chase indices show.

Russian spreads climbed 14 basis points to 233 over the same period.

South Africa would probably miss a 2.7 percent growth target for 2014 set in the February Budget, Finance Minister Nhlanhla Nene told reporters on July 1. The government has pledged to narrow the budget deficit to 2.8 percent of gross domestic product in three years’ time from 4 percent in the fiscal year to March.

The rand has declined 2.4 percent against the dollar so far this year, adding to last year’s 19 percent slump.

A 5pm, the rand was bid at R10.6832 to the dollar.

“If you look at the impact these strikes are having on the economy, it obviously has knock-on effects in terms of the ability of the National Treasury to rein in the budget deficit,” Jeffrey Schultz, an economist at BNP Paribas Cadiz Securities, said from Johannesburg on Friday.

“Lower growth means lower revenue. From an investor point of view it is extremely concerning.” – Bloomberg


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