SA bonds begin trading as junk for first time since 2000

Hot spots in emerging markets this week: SA and Russia

Dubai - South African bonds will trade on Monday carrying junk grades from two ratings agencies for the first time since 2000, while Russian assets may come under pressure as tension between President Vladimir Putin’s government and the US escalates after an American missile attack in Syria.

South Africa

The rand fell for a second straight week after Fitch Ratings dealt a fresh blow to South Africa on Friday when it cut the nation’s debt to below investment grade, following a similar move by S&P Global Ratings.

JPMorgan will cut SA from its investment-grade-only EMBIG indexes, which are tracked by $49bn (R677bn) of funds, on April 28. It will also exclude the nation’s debt from its GBI-EM GD and ELMI+ investment-grade-only indexes tracked by $10bn (R138bn) of funds on 31 May.

The currency has weakened by about 10% over the past two weeks, more than any other major currency in the world. By Monday at 07:20, it was trading at R13.81 to the dollar. Rabobank’s Matys sees the rand dropping to 14.5 per dollar by the end of the quarter.

President Jacob Zuma has plunged the nation into a political crisis since firing Finance Minister Pravin Gordhan in a cabinet purge March 31.

“In light of the junk status, we will need to revise expenditure patterns as a government,” African National Congress Economic Committee Chairman Enoch Godongwana told reporters in Johannesburg on Sunday.

“Another downgrade in just one week is a major blow,” said Piotr Matys, an emerging-market strategist at Rabobank in London. “It means that even those foreign investors that are still relatively optimistic about the long-term outlook for South Africa may have to trim their exposure. In the coming weeks, we will probably witness a wave of capital outflows.”

Assets of state-owned companies also declined. The yield on Transnet’s $1bn of notes due 2022 rose 19 basis points to 5.28%, the highest since December 6. The rate on Eskom’s 2021 dollar debt increased 35 basis points to 5.84%.

Russia

Russian assets will continue to weaken over worries about rising tension with the US, says Timothy Ash, a senior strategist at Bluebay Asset Management. The ruble was the worst performer among 31 major currencies tracked by Bloomberg on Friday, falling 1.5%, while the country’s credit-default swaps jumped the most in the world.

Putin has slammed the US attacks in Syria as an “act of aggression,” dispelling hopes for improved ties between the two nations. UK Foreign Secretary Boris Johnson on Saturday cancelled a trip to Moscow for high-level meetings scheduled for Monday after coordinating with the US, saying he would meet instead with his Group of Seven peers in Italy to discuss the Syrian crisis and “Russia’s support for Assad.”

Turkey

Turks on Sunday will vote on a proposal to reshape the nation’s democracy by abolishing the post of prime minister and handing President Erdogan sweeping executive powers. The lira’s one-month implied volatility rose last week to the highest level since January.

Meanwhile, the US attack in Syria aligned Trump with Turkish policies on the civil war in the Levant nation. Turkey has been a steadfast proponent of targeting President Bashar al-Assad’s regime.

Venezuela

The country’s state-controlled oil-producer, known as PDVSA, is scheduled to pay $2.1bn in debt this week. The company has informed investors that all principal and interest related to its bond maturing this month will be paid on April 12, it said in an e-mailed statement. The bonds surged last week.

Egypt

The country’s EGX 30 Index of stocks fell Sunday by the most since February 27 after an explosion tore through a church in the Nile Delta city of Tanta, killing at least 21 people. It was followed by another attack in Alexandria that left at least 13 dead.

The blasts underscore the challenges confronting President Abdel-Fattah El-Sisi as his government tries to attract international investors to an economy battered by years of unrest. The IMF said last week it’s working with Egyptian authorities to help control inflation that surged past 30%  in February.