Major trade war threat to South Africa

South Africa will pay considerably more than it originally envisioned if it follows through on plans to raise foreign debt after President Donald Trump’s imposition of reciprocal tariffs on most of the US’s trading partners sparked a selloff of riskier assets.

Trump last week announced his intention to tax a range of imports, accusing other nations of exploiting America’s openness while protecting their own economies from fair competition.

South Africa’s sovereign spread — the premium investors demand to hold the country’s dollar bonds rather than Treasuries — has since jumped to its highest level in almost two years.

It’s widened in line with global credit spreads, which were up 100 basis points from very low levels. 

“At these spreads it would be difficult to bring new issuance to the market,” said Rashaad Tayob, portfolio manager and macro strategist at Foord Asset Management on Tuesday.

“If the market remains stressed, that will have to be raised locally.” 

In its March 12 budget review, the National Treasury said it plans to raise $14.6 billion over the next three years to meet its foreign-exchange commitments from multilateral development banks, international financial institutions and capital markets.

On Monday, the Treasury said it remains on course to execute its borrowing strategy, including raising funds offshore.

“While we have noted the recent widening in sovereign spreads and the heightened volatility in global markets, with many investors currently adopting a risk-off posture, we remain confident in our ability to execute our borrowing requirements efficiently,” it said in response to emailed questions.

“We continue to monitor the market closely and hope to see a return to more stable conditions in the coming weeks, which would allow us to take advantage of traditional issuance windows.”

Political uncertainty in South Africa has added to the premium investors have been seeking to buy and hold the country’s assets at.

The two largest parties in the nation’s 10-member coalition government, the African National Congress and the Democratic Alliance, have been sparring for weeks over the national budget, raising concerns about the durability of their alliance.

South Africa’s assets remain appealing despite the increased risk aversion in the financial markets, said Kristof Kruger, a fixed-income trader at Prescient Securities.

“I suspect asset managers are starting to dip their toes in, though the water’s still scalding,” he said.

“These bonds are cheap for a reason, particularly as South Africa grapples with fiscal challenges and global emerging-market sentiment remains rattled by recent outflows.”