Offshore investors in record sale of South African bonds

Foreign investors sold R34.7 billion ($2.5 billion) worth of South African bonds between January and June, the highest sell-off on record, data from the Johannesburg Stock Exchange showed, driven by a drought of cheap money and a US-China trade spat.

While confidence in South Africa’s growth prospects has improved since Cyril Ramaphosa was elected president in February on a pledge to make policy more investor friendly, global economic conditions have dampened the enthusiasm seen earlier in the year.

The sell off since the start of the year eclipses those seen during the 2008 global financial crisis and the dot-com crash between 2000 and 2001. Over the same period in 2017 the country’s bonds recorded a R45.7 billion inflow.

“There’s been too much cash pumped into emerging markets for that specific yield pick-up and now there’s a bit of fear that emerging market’s aren’t printing growth whereas developed markets are, especially now that quantitative easing is drying up,” said fixed income analyst at Rand Merchant Bank Michelle Wohlberg.

Foreign investors have pulled about $5.5 billion out of emerging market economies since the Federal Reserve’s interest rate hike last week, data from the Institute of International Finance showed.

“The biggest thing is the US hiking rates and emerging market’s are not necessarily stepping up, so the US is looking like the best place to put your money,” said Wohlberg.

The US Federal Reserve is winding down its massive asset buying spree at a faster pace and also began hiking lending rates this year as its economy expands and inflation rises. The European Central Bank is set to follow suit.

Yields on local as well as dollar bonds have risen in response.

The benchmark bond due in 2026 rose to its highest since December on Monday, while the 5-year and 10-year CDS spreads jumped more than 50 basis points each in the past month, to levels seen before the dismal first quarter economic growth figures.

“It makes sense. An economy in recession is going to reduce income into the government’s coffers which equate to a wider budget deficit and thus a much larger debt-to-GDP ratio than ratings agencies would like,” said chief trader at Standard Bank Warrick Butler in a note.

The rand has also suffered, slumping nearly 9 percent against the dollar this year.

Waning ‘Ramaphoria effect’

Senior analyst at Nedbank Reezwana Sumad said investors and ratings agencies were now focused on likely changes to the Constitution.

The government has plans to increase the ownership stake for black people at mining companies to 30% from 26% and redistribute land without compensation to address racial inequalities that persist more than two decades after the end of apartheid.

Investors, the International Monetary Fund and ratings agency Moody’s say they are concerned by these policies.

“The tailwinds from the ‘Ramaphoria effect’ seems to have been overshadowed by global developments. Local fundamentals have fanned the flame of global risk-off rather than extinguishing its effect on local markets recently,” said Sumad.

Data this month showed South Africa suffered its worst quarterly contraction in nine years, shrinking by 2.2% from a 3.1% expansion, led by a slowdown in agriculture and mining, the latter weighed down by slack export demand.