The Daily Update - EM-Motions Spread To South Africa

Bad things come in threes, so they say, and this week began with expectations of (at least) a third Emerging Market domino: following Turkey’s and Argentina’s continued fall from grace. Right on schedule, South Africa stepped up, entering its first recession in nine years, then the following day bolstering the disappointment with factory output data down the most in over two years. The slowdown in the agricultural sector was a major driver of the economic weakness, but political and policy uncertainty were also major unquantifiable factors.

In the current atmosphere of contagious apprehension, this was enough to send the South African rand down 6% so far this month pushing the currency’s depreciation in excess of 20% year-to-date. The sharp depreciation echoes the collapse of the currency towards the end of 2015 – when Zuma booted his Finance Minister proving his reckless disregard of markets. And apart from the brief few days after this fiasco (when the rand briefly teetered towards 18 to the dollar) today’s testing of 15.7 places it very close to historical lows.

For a long time South Africa has remained a net foreign debtor but its finances have deteriorated in recent years to put the country into our weak 2-Star category (with Net Foreign Assets worse than -50% of GDP) and seems to be firmly on the path towards 1-Star and net foreign debts exceeding annual GDP. With yields on South African dollar denominated (10-year) debt up 150 basis points this year along with its currency losing a fifth of its value, managing these excessive debt burdens becomes increasingly unsustainable – all the more as investors recant their benefit-of-the-doubt and take seriously concerns over ability to pay. This is why we continue to advocate for distinguishing between net foreign creditor and net foreign debtor emerging markets; for when fundamentals become more deliberated having the net foreign assets and ability to pay should dominate over factors like market maturity or growth expectations.

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