Ratings cut? SA's local bonds already trade as junk

S&P Global Ratings cut South Africa’s local currency debt to "junk" status, while Moody’s placed the country on review for a downgrade. However, the view long held by seasoned emerging bond investors is that the once-prized but inexorably deteriorating emerging market deserves to be treated as junk. Plagued by corruption, moribund growth, refusal to embrace reform and - most recently - by a budget deficit blowout revealed by finance minister Malusi Gigaba, South African 10-year bonds yield over 9%. That is well above Indonesia, Romania or Hungary, which carry the same rating from Moody's. The cost of insuring exposure to South Africa's debt via credit default swaps (CDS) is also higher than peers with the same Moody's rating. Its five-year CDS spread is double Indonesia's, for instance. "If you look at external debt spreads and CDS, that's pretty much bang on where the average BB credit trades. It's trickier to compare on the local side, but nonetheless it's cheap . . . real yields are among the highest in EM," said Paul Greer, senior trader at Fidelity International. Correspondingly, South African dollar bonds pay an average premium of 287 basis points over Treasuries, while Indonesia pays 173 bps. "It feels like time has run out," said Sailesh Lad, senior portfolio manager at AXA Investment Managers who is "underweight" South African debt in his portfolio. "The budget tells you the debt dynamics are on a worsening trend, the finance minister has not delivered what was anticipated." Gigaba in October slashed growth forecasts and hiked his budget deficit to 4.3% of gross domestic product from 3.1% in April, pencilling in a big rise in borrowing. For Lad, this means little policy change can be expected after the ruling ANC party's December conference that will vote to replace its scandal-plagued leader Jacob Zuma. "Whoever wins in December, the ANC has already dictated what policy is going to be . . . Are you going to see wholesale change? I don't think so," he said. Cristiana de Alessi, a portfolio manager at BNP Paribas Asset Management, said most of the risks cited by agencies for the sovereign rating had already materialised. For her, the turning point came in March when Zuma sacked respected finance minister Pravin Gordhan without warning. "The ratings agencies always talked about the strength of the institutions, and you can see a marked deterioration in the Treasury over the past six months or so," she said. – Nampa/Reuters

Ratings cut? SA's local bonds already trade as junk

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Namibian Sun 2025-05-13

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Ratings cut? SA's local bonds already trade as junk

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Namibian Sun 2025-05-13

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