SA not alone in capital flight, all emerging markets suffer

A net capital flight of R14.4 billion of the county’s bonds, sold from last month by nonresidents, indicated foreign investor discomfort with all emerging markets, according to an investment expert.

Head of fixed income at Momentum Investments Ian Scott is, however, bullish.

“While this selloff is undoubtedly significant, it … doesn’t represent a weighty share of South Africa’s bond issuance.

“Investors are reducing their exposure to emerging market assets in general as concerns have grown around the trade friction between the US and China – and global growth in general.”

Scott said SA was not the only country experiencing the foreign sell-off of its bonds.

Emerging markets referred to economies progressing towards becoming more advanced – usually by means of rapid growth and industrialisation. These included SA, Turkey, Brazil, Argentina, Poland, India, China, Indonesia, Mexico, South Korea and Egypt.

“The real yields on South African bonds are still attractive, given the risks, particularly when compared to other asset classes.

“As such, more and more local investors have been prepared to get in,” said Scott. “Capital flight out of the country certainly has an impact. We need foreign capital to fund debts and infrastructure development.”

He was encouraged by a sentiment expressed by Lucie Villa, lead analyst for Sub-Saharan African sovereigns, who told a media briefing that there was no likelihood of a Moody’s credit rating change.

He said: “Were [Moody’s] to downgrade us, bond yields were going to come under pressure and that would mean less capital to fund debt. Being downgraded to a junk status has serious implications for food and fuel, with prices going up.

“Applying prudent fiscal discipline is the way to go now and Finance Minister Tito Mboweni is on the right track with his grand plan, which should to take us out of this financial challenge.”

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