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Unfazed: SOAF CDS

08 September 2020 by jbchevrel

South Africa’s restrictions to curb the spread of COVID have put the economy deep in recession. SOAF is in its longest recession in 28 years. GDP was down an annualized -51% QoQ in Q2, compared with a revised -1.8% QoQ contraction in Q1. Consensus was for -47% QoQ in Q2, slightly too optimistic. A strict nationwide lockdown that started on March 27 deepened the slump. Enforced by the police and military, people were only allowed to leave their homes to buy food, collect welfare grants and seek medical care. The gradual re-opening started on May 1, many companies closed down permanently or fired workers during the shutdown. The structural offer from exporters disappeared on $ZAR, and the pair is up by close to one percent today. Along with that, SOAF 5y CDS is wider, but not by much (+5bp), especially considering its tightening of roughly 200bp since the wides in April. Sentiment toward the sovereign is deteriorating. ZAR has lost -2% vs USD, week to date. In rates space, demand at SOAF weekly government auction (local currency debt) was the lowest in 2 months. The primary dealers placed ZAR 13.1b ($776m) of orders for the ZAR 6.6b of securities on sale. Anecdotally, the lowest since June 8.