“Volcano eruption” for SA bonds

“Volcano eruption” for SA bonds

While the rand’s 8% plummet to the dollar may be good for the local market, it’s a gloomy sign for foreign investors and it removes the attractiveness of South Africa’s debt. The Societe Generale SA says that there is a huge risk of foreign investors selling off their investments, which does not bode well for Africa’s largest economy.

Bloomberg monitored the performance of 25 emerging markets and South Africa’s currency drop against the dollar was the worst of the lot. Foreign investors face increased risks as the country’s current account deficit reached its highest in four years; having been negatively affected by the mining strikes (which made international headlines) and Europe’s slower growth. Exports dropped as a result, which widened the current account shortfall. In order to rectify this, an influx of foreign capital is required to fund imports. This funding isn’t looking so good at this stage, even after 2012 purchases were pleasingly high.

Benoit Anne of Societe Generale in London says that trouble lurks beneath the surface of the South African market: “We may be getting closer to a real money investor capitulation – the market equivalent of a volcano eruption.” South Africa’s debt of all 12-month and longer maturities has lost almost 7.5% for those investing dollars in the country in 2013. South Africa is the third worst out of 26 markets for dollar investors, trailing Japan and the UK.

In 2012, foreign investors bought an average of R1.8 billion in South African bonds per week – according to data at the Johannesburg Stock Exchange – while in 2013 (up to the middle of March) foreign investment in bonds has averaged R1.2 billion per week. The government bonds will yield 6.84% in February 2023 – a yield that my rise slightly by the end of the year based on Bloomberg survey results from five analysts (with currently tricky finance jobs).

And it looks like we’re back to the alarming current account gap experienced in 2008, with the gap reaching 6.5% of the GDP, which represents a huge shortfall. However, it’s not all bad news: this gap is likely to be narrowed by the competitiveness of South African goods thanks to the weaker rand and the country’s fairly high interest rates. These factors combined still have the chance of attracting foreign investment to South Africa’s bonds, which will hopefully see a rand recovery before the proverbial volcanic eruption and mass bond sale by existing foreign investors.

All is not doom and gloom, however, as although there is much to worry about, South Africa’s ecommerce business entrepreneurs are doing well as the e-economy continues to boom.

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