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And this was just Q4…

03 March 2020 by jbchevrel

Today the republic of South Africa reported a Q4 GDP well below expectation, which officially takes this economy in its 2nd recession in 2 years. And as the title suggests, this is about Q4 alone. Indeed, SOAF’s economy contracted by -1.4% in the fourth quarter, as gross fixed capital fell the most in four years. Gross fixed capital formation dropped an annualized 10%, the biggest contraction since the fourth quarter of 2015. Also the Q3 number was revised lower by two tenths. From -0.6% to -0.8%. as a result, full year 2019 growth printed virtually at flat (+0.2% yoy). Looking on Bloomberg consensus, +0.8% in 2020 and +1.4% in 2021 seems very very optimistic. I doubt it’s what the market really expect though. On a close to close basis, the 5y CDS has been between 155 and 220 year to date. The covid19 is a real risk for this economy both directly and indirectly. For this economy already in recession before any covid19, it’s hard to see those forecasts realise. South African President Ramaphosa said his administration’s drive to turn the economy around will be protracted and is being frustrated by the rapid spread of the coronavirus around the globe and other factors beyond its control. Indirectly also, covid19 will keep hurting SOAF GDP. Already in 2019, mining production and manufacturing production were both responsible for roughly -1% YoY of GDP. Those two items in GDP are especially vulnerable to covid19 going forward. This weak picture partly explains why we closed SOAF CDS +2 today while the CDX EM is tighter -16 mainly thanks to the Fed cutting rates by -50bp on a Tuesday...