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Political bust up revives spectre of junk on bonds

Johannesburg - The latest bout of political turbulence has reignited fears among international investors that the country is on the brink of losing its investment-grade status.

Yields on the nation’s dollar bonds jumped the most in more than three months on Tuesday after President Jacob Zuma was said to have told senior South African Communist Party members that he plans to fire Finance Minister Pravin Gordhan.

The three largest credit-ratings firms - S&P Global Ratings, Moody’s Investors Service and Fitch Ratings - have said that further political infighting in the country may prompt downgrades.

"It doesn’t help South Africa’s case in front of either investors or the rating agencies," said Carmen Altenkirch, an emerging-market sovereign analyst at AXA Investment Managers UK in London who had planned to attend investor meetings with Gordhan and his deputy.

Zuma told Gordhan to cancel the meetings, according to a presidential spokesperson.

South African bonds and the rand have rallied this year after S&P left its assessment of the nation’s foreign-currency debt unchanged at one level above junk in December, boosting sentiment after a year of political upheaval. S&P warned that any further political interference in fiscal policy could lead to a downgrade.

The yield on government dollar bonds maturing in May 2022 jumped 10 basis points to 3.75% on Tuesday, the most since December 15.

They may widen a further 80 to 100 basis points if Gordhan is fired, according to Anders Faergemann, a senior fund manager in London at PineBridge Investments Europ which manages about $83bn globally.

A downgrade "could be devastating for the country’s bond market," Faergemann said. "This would be a real shame as South Africa’s bond market had become a bit of a darling with yield-seeking investors."

A credit-rating cut to junk would remove South Africa from some global benchmark indexes, triggering forced selling from funds that track those gauges or are restricted from holding sub-investment grade debt.

Fitch on November 25 revised the outlook on its BBB- rating to negative from stable and warned that continued political turmoil could result in a downgrade. Later the same day, Moody’s, which rates South Africa’s foreign-currency debt at the second-lowest investment grade level with a negative outlook, said that political infighting, which leads to policy uncertainty and slows structural reforms, could result in a cut.

Moody’s declined to comment on how the latest political developments affect its rating outlook. S&P didn’t respond to phone or emailed requests for comment. Fitch said it has not made any change to its view.

It would be "a tremendous pity if the president was to undertake changes that upset stability and the investment-grade rating," Colin Coleman, a partner and head of Goldman Sachs Group in South Africa, said in an interview on Bloomberg Television.

It’s "unlikely that foreign direct investment will flood in" to South Africa with this risk.

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