Investors see Russia less risky than SA as strikes impede growth

South Africa’s perceived credit risk among investors is eclipsing that of Russia’s as labour unrest weighs on growth in the continent’s second-biggest economy.

The cost of insuring the nation’s debt against non-payment for five years using credit default swaps rose five basis points to 185 since July 1, when South African metalworkers began a wage strike, according to data provider CMA. Contracts for similarly rated Russia fell seven basis points in the period to about 173, as concern eased over the economic repercussions of the conflict with Ukraine.

The strike by about 220 000 members of the National Union of Metalworkers of South Africa began about a week after more than 70 000 platinum miners ended a five-month stoppage that caused growth to shrink 0.6% in the first quarter. The economy suffered further in the next three months, with reports last week showing mining output and manufacturing slumping in May. The nation’s creditworthiness was cut by Standard & Poor’s a month ago.

“Our growth is getting downgraded,” Abri du Plessis, who helps manage the equivalent of about $373-million at Gryphon Asset Management in Cape Town, said by phone on July 11. “We’ve seen credit downgrades and there is always a concern of the rand blowing out further. One sees the sentiment in Russia going in the opposite direction.”

Premium widening
Russian default swaps traded higher than their South African counterparts between March 3, the month Crimea was seized from Ukraine, and June 6. Starting July 2, the South African contracts have consistently been higher, signaling greater investor concern.

Government-mediated efforts to end the metalworkers’ strike faltered on July 11, when the labour union rejected a revised pay offer from the Steel and Engineering Industries Federation of Southern Africa. The employers’ lobby estimates the stoppage is costing as many as 12 000 companies about R300-million a day.

“Risk in South Africa is deteriorating relative to other emerging markets,” Peter Attard Montalto, an emerging-markets economist at Nomura International, said by phone from London on July 10. “The CDSs [credit default swaps] and widening bond spreads reflect heightened concern.”

Speedy resolution
The premium investors demand to hold South African debt rather than US Treasuries rose 23 basis points since reaching a one-year low on June 9, to 222 on July 11, JPMorgan Chase & Co. indexes show. Russian spreads climbed 14 basis points to 233 over the period.

South Africa will probably miss a 2.7% growth target for 2014 set in the February budget, Finance Minister Nhlanhla Nene told reporters on July 1. The government has pledged to narrow the budget deficit to 2.8% of gross domestic product in three years’ time from 4% in the fiscal year that ended in March.

The rand declined 2% against the dollar this year, adding to last year’s 19% slump. It was little changed at 10.7047 per dollar by 2.32pm in Johannesburg.

“If you look at the impact these strikes are having on the economy, it obviously has knock-on effects in terms of the ability of the National Treasury to reign in the budget deficit,” Jeffrey Schultz, an economist at BNP Paribas Cadiz Securities, said by phone from Johannesburg on July 11. “Lower growth means lower revenue. From an investor point of view it is extremely concerning.” – Bloomberg

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