President Jacob Zuma’s vision of radical economic transformation may be realised sooner than he expected following the announcement by a leading global financial services firm that South Africa would depart from its investment-grade emerging market bond indexes starting in late April.
The announcement by JP Morgan came on the heels of Fitch Ratings’ downgrade of South Africa’s debt ratings to junk status.
This means JP Morgan will cut just under R680 billion of South African bonds from its investment-grade-only emerging market bond indexes and about R138 billion of debt linked to its global bond index-emerging market indexes.
“The R138 billion of debt is quite a lot and, because they are doing it, other bond indexes will also be going out.
“Maybe they are smaller and won’t make the news as much, but I think you can work on much more leaving the country eventually,” said Mike Schussler, economist and founder of economists.co.za.
“The rand will be very volatile following the pre-announcement and it’s not going to help us at the moment.
“We probably won’t receive the interest cut we had hoped for in May or June, and at the moment it looks like we’re going over 50 cents on the petrol price already, which will affect inflation,” said Schussler.
Buckle your seatbelts, it’s going to be a bumpy ride, cautioned Professor Jannie Rossouw of the Wits School of Economic & Business Sciences.
“It’s not clear from the short statement if the investment company was going to remove South Africa from its books or divest from those bonds,” Rossouw said.
“We all expected some fallout after being declared junk status; I’m not surprised, I expected JP Morgan to announce this.
“With the bonds being sold off, it follows automatically there will have to be higher interest rates on these bonds.”
The economy has been a runaway train on greased rails since the April 1 Cabinet reshuffle, which saw President Jacob Zuma replacing Pravin Gordhan with Malusi Gigaba at the helm of National Treasury.
The rand-dollar exchange rate hit a high of R13.92 on Monday, with a low of R13.84, according to forexforecasts.co.za.
Benchmark for markets:
The JP Morgan indexes are a popular benchmark for money managers that deal in emerging market debt, so investors may see the index used as a comparison for their mutual funds or exchange-traded funds.
Because of their higher interest rates, emerging market bonds can significantly outperform US Treasury bonds.
The bond market – also called the debt market or credit market – is a financial market in which participants are provided with the issuance and trading of debt securities. – investopedia.com
Download our app and read this and other great stories on the move. Available for Android and iOS.
