South Africa: Bonds remain steady

Fears that the recent violence at mines in South Africa may push up borrowing costs and undercut investor confidence have been allayed, at least for the moment, with money flowing back into the country’s bond market. However, longer-term concerns over the local debt market remain.

On August 16, a long-running stand-off between striking workers and police at Lonmin’s Marikana platinum mine turned violent, with police opening fire on the miners, who were calling for wage increases and improved conditions. The clashes resulted in the deaths of 34 miners and 78 others wounded. While the government immediately announced it would conduct a full investigation into the incident, it will be some time before any conclusions are released.

Although the strikes were limited to the mining sector, the outsized influence of the industry on the broader economy meant that the reverberations were felt across the board. The impact on the South Africa’s capital markets was more immediate, with yields rising on bonds and the rand sliding against most currencies. Yields on government bonds due March 2021 hit 6.97% the day following the shooting, a rise of 0.06%, the highest level in just over one month.

The violence prompted fears that there would be more unrest at South Africa’s mines, which would weaken investor confidence and harm its credit ratings, and that further violence would likely push up borrowing costs. Currently, the mining sector has experienced marginal growth over the past year, but it nonetheless comprises roughly a third of the total capitalisation of the stock exchange and is at the forefront of broader debates – including labour and nationalisation – over economic policy.

According to Kieran Curtis, a fund manager at Aviva Investors, a London-based firm, “South Africa is at risk of drifting towards lower credit quality. The more evidence you see of acute social issues like this, obviously it is not good for that process.”

For the moment, though, the South African debt market is recovering from the surge in bond yield prices. By August 21, both the rand and government bonds had regained lost ground, with bonds rallying as foreign investors returned to the market.

In a note issued on August 21, Rand Merchant Bank said that while there would be a lingering negative effect from the violence, these should “ease the further we get away from the event”.

This assessment seemed to be supported by data issued by the Johannesburg Stock Exchange, which showed foreign investors returning to the bond market on August 20, buying $139.43m of South African bonds, excluding repurchase (repo) transactions. This was a marked turnaround on the previous trading day of August 17 – the day following the clashes at Marikana – when there were net sales of $273.72m of local bonds.

Recent events also did not appear to impact the success of an issue by Eskom, a public electricity utility, on August 22, with the state-owned company selling $36.5m of an inflation-linked bond, due to mature in 2028, at a clearing yield of 2.17%. This was marginally lower than the 2.19% yield of earlier issues. This slight easing in borrowing costs suggests that buyers have overcome any jitters that may have affected the market, with investors prepared to factor in any shorter-term worries into their longer-term outlook.

Some analysts, however, believe the incident could add to difficulties of attracting investment, particularly for the mining sector. A number of other mining companies, such as Northam Platinum, have said they are looking into tapping the bond market for further funding, though the industry may find it harder to keep costs down due to the recent unrest.

While the Marikana incident does not appear to have had a significant impact on markets, there remains an element of uncertainty for the future, according to Konrad Reuss, the managing director for sub-Saharan Africa at Standard and Poor’s.

“Marikana is a concern, as this is the kind of worry about South Africa’s social and structural challenges that is already behind our negative rating outlook. Policy and political responses are hopefully not leading us down the wrong path in terms of populism‚ intervention and deterring investment‚” he said in an interview with I-Net Bridge, a financial information services firm, on August 21.

The government will be keen to keep borrowing costs down, as it has to fund a deficit in budgetary spending, which the central bank estimates will be 1.9% for this year and through until the end of the 2013/14 fiscal cycle, after which a primary surplus is expected.

The state and its parastatals also have major plans for infrastructure spending in the coming years, which will stimulate the economy directly and strengthen the transport and utilities backbone of the country. This programme will have to be funded − at least in part − through the bond market, though if yield prices spin out of control, it will greatly increase the cost of the investment scheme.

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