South Africa’s bond market soared following the May general election, which saw the African National Congress lose its parliamentary majority for the first time since apartheid ended. Rand-denominated debt securities led global returns, yielding a 17% total return in four-and-a-half months. Investors anticipated a coalition government with the pro-business Democratic Alliance, leading to improved economic outlooks and stabilized currency. This historic turnaround highlights investor confidence in South Africa’s evolving political landscape.
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By Matthew A. Winkler
Leave it to the bond market to prove democracy is a capitalist tool. Nowhere is that truer than in South Africa, where rand-denominated debt securities are No. 1 in the world after the May general election ousted the African National Congress as the parliamentary majority for the first time since apartheid ended 30 years ago. ___STEADY_PAYWALL___
Investors in the fixed-income assets of the beleaguered nation of 61 million people enjoyed a total return — price appreciation plus interest — of 17% the past four-and-a-half months. That’s a multiple of any developed country and double that of second-best Chile in emerging markets, according to data compiled by Bloomberg. The gains suggest investors anticipated that voters would repudiate the ANC and its failure to reverse the rising rate of violent crime, collapsing municipal sewage infrastructure exacerbated by energy shortages and the rand’s 24% depreciation since 2017.
So as South Africa signaled its preference for a coalition government between the ANC and the No. 2 party’s pro-business Democratic Alliance, the “Rainbow Nation” for the first time has a halo in the global bond market.
There’s no question the election made the difference. South Africa bonds lost 5.2% in the first quarter, making it the fifth-worst performer among 19 countries in the Bloomberg Emerging Market Local Currency Government Bond Index. The second-quarter turnaround is unprecedented, with rand-based government securities gaining 12% when measured in US dollars, beating the debt of 18 other developing nations as the benchmark index declined 0.2%. No country has come close to matching South Africa’s rebound since the index was created in 2008. The bonds of Sweden, the best-performing developed country, returned 3% during the same period.
South Africa’s total return was mostly attributed to the 7.5% gain in the bond market and additionally aided by the rand strengthening 3.9% during the second quarter after it weakened 2.8% in the January through March period. At the same time, traders’ bets on the currency’s price fluctuations shifted toward stability as the three-month implied volatility declined 1.55 percentage points since the beginning of April, the biggest decrease in risk among the 19 most-traded emerging market currencies, according to data compiled by Bloomberg.
Some $10 trillion of credit-default swaps, which are financial derivatives that allow investors to offset their risk with other investors, show South Africa becoming much less expensive to insure against deteriorating credit. Five-year CDS on the government’s rand-denominated debt declined 24% since the beginning of April, the largest improvement among the 25 most-traded sovereign debt issuers, data compiled by Bloomberg show.
The expectation of faster inflation is another metric of investor confidence that turned favorable on the prospect of the ANC losing its parliamentary majority. Bets on South Africa’s average inflation over 12 months, measured as the difference between the nominal bond yield and the inflation-protected bond yield, diminished by almost half during the past two months to 3.1% from the actual consumer price index of 5.6% in February and the current CPI of 5.2%. The so-called break-even rate for 12 months is the lowest since data was compiled in 2012, Bloomberg data show.
South Africa’s economic outlook, meanwhile, has been upgraded four times since March, to 0.52% growth in the fourth quarter, the most optimistic average forecast of 10 economists who contributed their research to Bloomberg for more than one year. They now say GDP will expand 0.6% by the end of September.
“With inflation moderating some, the South African Reserve Bank may cut interest rates as early as the fourth quarter,” after 10 increases since 2020, said Yvonne Mhango, the South Africa economist at Bloomberg Intelligence. That would be a watershed moment for the country, which last experienced such credit easing four years ago during the worst days of the Covid-19 pandemic.
Beset by corruption and poor governance, South Africa has long fallen short of its potential as the largest economy on a continent bursting with promise. Just look at the rand, which has depreciated in 10 of the last 13 years. Although it’s still early days, the reaction in the bond market to a more democratic government should be seen as encouraging.
Read also:
- SA stocks surge on political optimism and reform expectations
- Market optimism as South African assets rebound amid coalition talks
- Anticipated ANC majority loss sparks market uncertainty, Rand plummets
© 2024 Bloomberg L.P.
