Blackouts, political risks weaken demand for SA bonds
Foreign investors have continued to dump South Africa bonds like hot pancakes as the risk of holding government paper increases with the heightened powers and the implications for the economy already seen growing at a paltry 0.1 per cent according to the South African Reserve Bank and IMF. The intensity in selling comes ahead of the S&P ratings update tomorrow, which revised South Africa’s outlook from stable to negative in March and already grades the sovereign as sub-investment grade. CNBC Africa is joined by Mandisa Zavala Head of Asset Allocation at AlexForbes.
Thu, 18 May 2023 11:14:07 GMT
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AI Generated Summary
- The intense selling pressure in the South African bond market is driven by rising political risks, power cuts, and a gloomy economic growth outlook, prompting foreign investors to offload their holdings.
- South African bonds, despite offering high real yields, are experiencing increased default spreads and risk premiums, signaling investors' concerns about potential defaults and overall market risk.
- Government bond auctions have been mixed, with shorter-dated papers faring better than long-dated ones, while corporates are grappling with challenges such as power cuts that directly impact their operations, leading investors to favor government bonds for their perceived security and robust yields.
Foreign investors have been rapidly offloading South African bonds due to increasing political risks and power cuts, driving the market sentiment to new lows. The South African Reserve Bank and the IMF have reported a meager 0.1% growth rate for the economy, further adding to the bleak outlook. The intense selling pressure in the bond market comes just before the anticipated S&P ratings update, with South Africa's rating already below investment grade. Mandeesa Zavala, the head of asset allocation at Alex Forbes, shed light on the situation in a recent CNBC Africa interview. Zavala highlighted the challenging scenario faced by South Africa, both domestically and globally, leading to a negative sentiment regarding emerging market bonds. The local currency's weakening trend against the US dollar has also contributed to the overall downtrend. The high real yields offered by South African bonds, though attractive under normal circumstances, are being overshadowed by the escalating default spreads and the increased risk premium associated with investing in the country's bonds. Investors are wary of potential defaults and are showing reluctance to engage in a market perceived as high risk. The recent negative news surrounding South Africa's economic growth prospects and the looming threat of sanctions have only added to the apprehension. Government bond auctions have encountered mixed results, with shorter-dated paper being more favorably received compared to long-dated bonds. Corporates, on the other hand, are facing challenges due to issues like power cuts directly affecting their operations. While corporate yields may seem enticing, investors are gravitating towards government bonds for their relatively stronger yields and lower idiosyncratic risks. The cautious stance in the market is not only a local phenomenon but is also influenced by global uncertainties, prompting investors to prioritize safety over higher returns. The looming possibility of a negative report from S&P has further dampened market sentiment, leading to more selling pressure. The deteriorating situation, including the prospect of severe power cuts and grid blackouts, has fueled concerns among investors, prompting them to explore alternative asset classes with better returns and stability. Despite some positive developments from the Treasury, the overall outlook remains bleak, forcing investors to reassess their risk exposure and seek safer investment options such as global bonds. The bond market turmoil is a reflection of the broader economic challenges faced by South Africa, underscoring the need for comprehensive measures to restore confidence and stability in the financial markets.
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