SA assets signal investor angst
SA assets are signalling increasing investor anxiety about Wednesday’s election, with the fate of the rand and government bonds tied to the extent of the governing ANC’s expected majority and what that implies for policy.
President Cyril Ramaphosa needs a strong mandate to push through fiscal and policy reforms in the face of opposition from factions within his party. But while a convincing majority may give assets a brief boost, the difficulty of the road ahead is making investors wary.
“President Ramaphosa’s ANC is all but certain to win this week’s election, but we’re sceptical that this will provide impetus to his sluggish reform drive,’’ said John Ashbourne, a senior emerging markets economist at Capital Economics, in a note to clients. “The ruling party will, after all, remain sharply divided. We expect that progress will be slow.’’
Volatility measures leave no doubt that rand traders see the election as an immediate, two-way risk. One-week implied volatility for the rand against the dollar has climbed above longer-term measures for the first time since March, and is now higher than any other emerging-market currency including the beleaguered Turkish lira.
Bearish bets are also rising. The premium of options to sell the currency in the next week over those to buy it, known as the 25 Delta risk reversal, has jumped to a one-month high, suggesting traders are more inclined to hedge against rand declines in the immediate aftermath of the vote.
“An ANC majority win nationally of close to 60% or higher is currently being seen as likely to strengthen the rand,” Annabel Bishop, the Johannesburg-based chief economist at Investec Bank, said in a note. “A material swing towards the left-wing populist parties, either in an election result, or in ANC coalitions after the elections, is believed to risk substantial rand weakness.”
While the options market indicates anxiety over the election itself, bond yields suggest investors are also concerned about long-term prospects for the economy. SA’s yield curve has steepened to the widest in 2019 as the rate on 10-year securities rose more than that on two-year bonds. While this is partly due to an increase in longer-dated issuance, it also reflects concern about the implementation of much-needed policy reforms to boost the economy.
“Foreigners aren’t looking at picking up long-term risk due to uncertainty with regards to the fiscal issues SA is facing,” said Michelle Wohlberg, a Johannesburg-based fixed-income trader at FirstRand Bank. Nonresidents have sold a net R5.9bn of South African bonds since mid-April, according to JSE data.
Hard-currency bonds also signal worries over the fiscal outlook post-election, according to ING Group. Yields on SA’s benchmark dollar securities are trending lower, but are about 50 basis points higher than those of junk-rated Brazil. While there could be a near-term rally for the debt after the vote, the medium-term outlook is clouded, said Trieu Pham, a London-based emerging-markets strategist at ING.
SA’s foreign debt is already rated junk by S&P Global Ratings and Fitch Ratings, and its one remaining investment-grade assessment at Moody’s Investors Service depends on how the government approaches the fiscal deficit and financial troubles of state-owned companies after the election.
“The persisting risk of losing Moody’s Baa3 rating is a negative technical overhang,’’ said Pham. “This is fairly reflected in the spread differential between SA and Brazil.’’