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The SA Daily 22 January 2018

Bond market discounts downgrade risk

  • The yield between SA’s 10-year USD bond and that of Turkey was 100 bps in January 2017; by November, the spread had narrowed to 25 bps. This compression implied that the SA bond market was increasingly concerned about downgrades for South Africa given that, at the time, Turkey’s foreign currency rating by both Moody’s and S&P would have matched that of SA, were it downgraded.
  • In the wake of the downgrade by S&P, and more specifically the positive political sentiment spurred by Cyril Ramaphosa’s appointment as ANC leader in December, the spread began widening; the market is now less convinced that SA will fall out of the WGBI (i.e. a downgrade by Moody’s, too).
  • Do no not foresee a Moody’s downgrade when the ratings agency concludes its current credit rating review – but we expect the negative rating outlook to remain in place. For our view to materialise, government would have to present a credible 2018 Budget that includes significant corrective steps to improve the fiscal prognosis from what had been presented in the October MTBPS.  

Note: graph on SA/Turkey Eurobond spread further down.

Daily commentary

Rand view: The rand opened stronger this morning after the ANC announced measures to be taken by the government this weekend by the ANC’s NEC (see below). These market-perceived positive developments see the rand in our Q1:18 trading range of 12.00-12.20. Our constructive rand view as well as the announcements over the weekend are important positive developments in terms of the policy steps required ahead of the Moody’s credit rating review after the 2018 Budget.

NEC developments over the weekend

  • It was decided unanimously that the ANC would ask Zuma to resign. If he should refuse, the top 6 NEC members would force him to step down.
  • The government also announced several measures to strengthen governance at Eskom. This includes the appointment of a new board (which will be ratified at the next cabinet meeting), a credible recommendation for a new CEO, and a directive to the board to remove those executives that face allegations of corruption.

SA ahead

  • Leading indicator for November tomorrow: The indicator increased by 0.7% m/m (3.9% y/y) in October. Disaggregated data indicated that six out of ten LEI’s constituent variables increased, while four decreased. The largest positive contribution came from change in job advertisement space, followed by an increase in the average number of hours worked in the manufacturing sector. The largest negative contribution came from a decrease in the SA’s produced export commodity price index (USD).
  • CPI for December on Wednesday: We forecast CPI at 4.8% y/y for December, from 4.6% y/y in November, mainly due to a sizeable increase in fuel prices in December, despite the counteracting moderation expected with respect to food inflation. The key forecast risks are food inflation and the quarterly survey of (the weighty) rental inflation.
  • PPI for December on Thursday: PPI for November increased to 5.1% y/y in November, from 5.0% y/y in October. We expect international oil prices at current levels to put pressure on PPI in the near term.

US government shutdown: There was a US government shutdown on Friday after Democrats and Republicans failed to agree on legislation regarding immigration and border security; they then failed to agree on a deal to fund government operations. The dollar suffered losses after the shutdown but has been recovering this morning, supported mostly by higher UST10-yr yields. Further, we wait to see how long the shutdown lasts, as this could have negative impacts for the US economy.

Oil prices are higher this morning after Saudi Arabia confirmed that cooperation between oil producers that are currently withholding supplies would continue beyond 2018.

On our radar

  • BoJ meeting on Tuesday: Investors are sensitive to any subtle signs on when the BoJ will follow the Fed and ECB, and start tapering.
  • SA CPI on Wednesday: We expect inflation to continue its downward trend. Real rates at current levels will support the rand at the margin.
  • ECB meeting on Thursday: We look to see if the ECB thinks that the euro zone recovery is strong enough to end current ECB bond buying.

Latest research publications:

SA Macroeconomics: Macro Weekly by Elna Moolman (22 January 2018)

Africa Trade Idea: Kenya: buy infrastructure bond; take-two by Jibran Qureishi (19 January 2018)

Credit Weekly: Slow start to the year by Robyn MacLennan, Steffen Kriel and Varushka Singh (19 January 2018)

SA Macroeconomics: MPC for January 2018 by Elna Moolman (18 January 2018)

Credit Quant Note: Secondary market: Quarterly by Varushka Singh (18 January 2018)

SA Economics: Nov retail sales 8.2% y/y by Thanda Sithole (17 January 2018)

Africa Flash Note: Nigeria: inflation surprises to the downside as the MPC is unlikely to meet this month by Ayomide Mejabi (16 January 2018)

African Sovereign Eurobond Weekly: African Eurobonds: No changes in overall composition of the portfolio by Dmitry Shishkin (15 January 2018)

SA Macroeconomics: 2018 SA economic outlook by Elna Moolman (11 January 2018)


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