South Africa is one of the riskiest places to invest in the world

·16 Aug 2015

South Africa is one of the highest-risk countries in the world when it comes to investment, according to new data from Bank of America Merrill Lynch.

The investment group published a map in its “Transforming World Atlas” report, showing how costly it is to insure investments in markets across the world.

The map is based on sovereign credit default swap (CDS) prices, which is considered insurance against non-payments. The higher the cost, the higher the risk.

According to Investopedia, a CDS works as such: payments are made to the seller of the swap. In return, the seller agrees to pay off a third party debt if this party defaults on the loan.

This is used by Bank of America to determine which sovereign markets are high risk regions (most likely to default on a loan) – with South Africa listed among some of the highest.

Bank of America credit risk

South Africa is regarded as a medium-high risk market, in line with countries such as Russia, Brazil and Turkey, but ranked 11th, overall by Bank of America.

Sitting high atop the ranking is Venezuela, which has a CDS insurance rate double that of Greece and even more than double Ukraine.

Last week, ratings firm Moody’s put out a note warning South Africa that its growth prospects were at risk, due to power constraints and troubles in the mining sector.

The group also encouraged the South African government to stop bailing out state-owned enterprises – such as Eskom and Sanral – as these had a negative impact on the state’s efforts to restrict spending.

Ratings agencies have been downgrading South Africa’s sovereign debt levels since 2011, which has been exacerbated in recent years due to continued struggles in the local labour market as well as power constraints which hit in the latter half of 2014.