Navigating political risk: Investors react to South Africa’s perceived support for Russia

South Africa’s financial markets are feeling the impact of political risk as the rand slumped to record lows against the US dollar. The slump came after the US ambassador to South Africa, Reuben Brigety, informed the South African media that Washington had reason to believe a Russian ship had loaded weapons and ammunition from the country in December, at a briefing. Local market insiders suggest that the risk of potential sanctions against South Africa is already being priced in, as foreign investors worry about the country’s perceived support for Russia. This could lead to them selling off their existing holdings in the country, further affecting its economy and financial markets.

Understanding the impact of political risk on South Africa’s sovereign bonds and credit market is crucial. Political instability and uncertainty can significantly increase the risk associated with investing in the country, leading to a higher risk premium for investors. The yield on the benchmark R2030 bond climbed by 30 basis points to 10.80%, the highest since early December.

South Africa’s perceived support for Russia creates a high degree of political risk, which could lead to a lower credit rating for the developing country. A lower credit rating would increase the cost of borrowing in international markets, potentially making it more difficult for the National Treasury to access global credit markets and finance essential economic activities and development projects.

At the end of Q1 2023, the R2030 bond accounted for 11.4% of the Anchor Capital BCI Bond Fund’s almost R3 billion AUM. Fund Manager, Nolan Wapenaar, tells MoneyMarketing that the domestic news of late has been “spectacularly negative.” He notes that the country’s credit trajectory is once again downwards, though South Africa is still in the correct peer group in terms of rating and does not stand out as overly weak. In the near term, the market does not believe that a downgrade is likely, but the current trajectory of events could lead to further downgrades in the longer term.

Investors could demand higher yields on South Africa’s sovereign bonds to compensate for the increased risk associated with investing in the country. This higher yield, or risk premium, could make it more difficult and expensive for the National Treasury to access global credit markets, which could limit its ability to finance important economic activities and development projects.

While South Africa’s trade with Russia is minuscule, the country is in a difficult position of keeping its BRICS partners happy while the Western Block disapproves of one of the BRICS partners. South Africa still relies heavily on the west as a major export destination, and the situation could lead to further volatility, according to Wapenaar.

The South African government responded to the accusation by announcing an independent inquiry, to be led by a retired judge, into allegations of the arms shipment to Russia. The situation is being closely monitored by investors as the impact of potential sanctions could have significant consequences for the country’s economy and financial markets.