Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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OP 2020: South Africa electrocuted by ESKOM debt
Kay Van-Petersen
Global Macro Strategist
Global Macro Strategist
Summary: USDZAR rises from 15 to 20 as world cuts credit lines to South Africa.
South Africa closes out 2019 with riveting news, both good and bad. The good news was that the nation’s beloved Springboks rugby team took home the World Cup trophy. Their last victory was in 2007, a year which ended with USDZAR below 7, versus 15 now. In carry-adjusted terms, the rand has fallen far less — only some six percent, though with plenty of volatility along the way. That is a near miraculous feat, given the bad news.
The very bad news is the South African government announcement late this year that in order to continue to bail out troubled utility ESKOM and keep the nation’s lights on, the budget next year is projected to balloon to its worst level in over a decade at 6.5% of GDP, a sharp deterioration after the government managed to stabilise finances at a near constant -4% of GDP for the last few years. Late 2019 saw some of the most generous credit conditions for emerging markets in history and the market somehow managed to absorb this news without jettisoning the rand to new lows for the year.
But in 2020, the jig will be up for the country. A brief investigation of the maths shows us why.
In 2007, the last time South Africa won the Rugby World Cup, GDP for the year was $309 billion in nominal USD. For the four quarters ending at Q2 2018, meanwhile, South African GDP was $338 billion in nominal USD. That rise may seem small — at less than 10% — but in constant US dollar terms (adjusted for US CPI), this means that the South African economy has shrunk a staggering 9% over the last 12 years. Worse still, the World Bank estimates that its external debt has more than doubled over that period to over 50% of GDP.
The ESKOM fiasco is the straw that will break the back of creditors’ willingness to continue funding a country that hasn’t had its financial or governance house in order for decades. Other uncreditworthy EMs will be drawn into the abyss as well in 2020, with the most differentiated performance across EM economies in years. USDZAR rises from 15 to 20 as the country teeters toward default.
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