LONDON — South Africa faces the risk of a huge exodus of foreign investors who are seeing the plunge in the rand’s value rapidly erode their stock and bond returns.
Report by Reuters
Africa’s largest economy has sucked in huge investments in the past two decades, but also has one of the world’s biggest balance of payments deficits — over 6% of its economy — and depends almost fully on portfolio capital to plug the gap.
Now a combination of domestic policy fears and structural problems along with a poor global trade and investment climate is weighing heavily on the country’s currency.
South African stocks and bonds have been a magnet for foreigners who now own a third of the bond market and up to half the equity free float in Johannesburg .JTOPI, which is home to multinationals like SabMiller and Anglo American and remains close to record highs.
A record R93 billion ($10 billion) flooded into the country last year, when South Africa became only the fourth emerging economy to enter Citi’s key global bond index.
But a ballooning deficit, sluggish 2-3% growth and fears of erratic policy before 2014 elections are weighing heavily on the rand which has lost 8% this year versus the dollar and a fifth of its value since early 2012.
Investor exits tend to pick up when returns turn negative and the rand is now perilously near the 9,30 per dollar rate, that analysts at UBS reckon is the “pain threshold” at which longer-term bond returns will tip into the red.
“You are seeing rand weakness eating away investors’ returns,” says Manik Narain, who co-authored the UBS report.
He estimates the average rand exchange rate was 7,70 per dollar over the past four years when most bond investors entered the market.
Cumulative returns during this time amounted to 20% according to UBS calculations.
“Another 1-2% loss on the rand could see them exit positions altogether,” Narain adds.
Rand weakness also ties the hands of the Reserve Bank of South Africa (SARB), preventing it from offering the economy vital monetary stimulus.
The SARB left interest rates on hold this week, noting the currency’s propensity to “overshoot”.