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Johannesburg - President Jacob Zuma is under pressure to reassure investors about South Africa’s finances as the economy sputters because of almost-daily outages.
Investors are paying 96 basis points more to insure the country’s debt against non-payment for five years using credit default swaps than for similarly rated Mexico, according to data compiled by Bloomberg.
The South African contracts gained 16 basis points this year to 208, compared with a six basis points increase in Mexico.
READ: SA institutions eroded under Zuma - economist
Sentiment toward South African assets is turning before Zuma gives his annual State of the Nation speech on Thursday as confidence wanes in the government’s ability to arrest flagging growth amid persistent electricity shortages.
While foreign investors were buyers of the country’s bonds in January, they have dumped a net R5.1bn of debt since February 3, the first of eight straight days of blackouts.
“South Africa is still viewed as a country with a lot of challenges,” Lars Nielsen, a fund manager at Kolding, Denmark- based Global Evolution AS, which oversees about $2.3bn including South African debt, said by phone on February 9.
“The electricity rationing and blackouts would just make the growth story worse than it is already. The outlook is not great and so you need to get paid for taking the risk.”
Electricity Crisis
The South African Reserve Bank (Sarb) has cut its 2015 growth forecast to 2.2% on January 29, from 2.5% two months earlier. Zuma told local newspaper editors on February 8 his administration has a plan to tackle the energy shortages, according to publications including the Star newspaper. This includes building nuclear power plants and supporting Eskom.
“Zuma will almost certainly address Eskom’s troubles and the electricity crisis,” Mark Rosenberg, Africa director at Eurasia Group in New York, said in an e-mailed note to clients on Febrary 9. The speech “will do little to alleviate investor concerns about the country’s core growth constraints,” he said.
Slower-than-expected economic growth will weigh on tax revenue, making it harder for Finance Minister Nhlanhla Nene to help Eskom pay for new power plants. Nene will deliver his annual budget speech in two weeks’ time.
The energy crisis will probably deepen, restricting growth to 1.6% this year, said David Faulkner, an economist at HSBC. The economy expanded an estimated 1.4% last year, short of the more than 5% the government is targeting to cut the jobless rate of 24.3% to 14% by 2020.
Sluggish Growth
Power shortages “will weigh heavily on confidence, deter investment and negatively impact economic activity and export performance,” Faulkner said in e-mailed comments on February 9.
“Where growth and job creation are the economic imperatives, the deteriorating outlook suggests little progress will be made toward addressing” unemployment, poverty and inequality.
The premium investors demand to hold the country’s dollar bonds rather than US Treasuries has widened 74 basis points since reaching a 16-month low of 195 in September, according to JPMorgan Chase indexes. The rand weakened 0.9% to 11.7882 per dollar at 12:49, bringing its decline in the past four days to 4.6%.
“Investors remain disenchanted by the sluggish pace of progress shown by the country’s leadership to address key challenges,” Phoenix Kalen, a London-based strategist at Societe Generale SA, said in an e-mailed response to questions.
