18 February 2020 by jbchevrel
Republic of South Africa (SOAF) 5y CDS was little changed today, in the area of 170bp, despite the continued underperformance of ZAR in FX space. $ZAR came up +0.5% yesterday after Moody’s lowered SOAF’s 2020 GDP forecast to 0.7% from 1.0%. It came up another +0.6% today before paring that to +0.25%, possibly more due to general $ demand. Moody’s is especially at focus because they are the only agency of the big three with still SOAF at an IG rating. While this CDS has largely followed the macro dynamic on the back of the coronavirus, since the end of January, it is possible that we see it de-couple from the broader EM complex in the next few weeks. Last week’s state of the nation address (SONA) given by President Cyril Ramaphosa failed to give details about a turnaround of ESKOM. It leaves us with the budget as next focus, as this will probably help Moody’s decision on whether to keep SOAF IG. For reference, the outlook had been set at negative back in Nov19, suggesting the probability of an incoming downgrade was high. The growth picture is still sluggish. A technical recession seems on the cards, although not too deep. Indeed, activity data show that SOAF economy contracted sharply in dec19 pulled by power shortages and renewed load-shedding. This is the most common reason for investor to be under-weight SOAF at the moment. The job market showed no sign of improvement despite seasonally higher than usual hires for the Christmas period. And seasonally adjusted retail sales fell -3.1% YoY in dec19, pointing to fragile consumption. Consumer confidence is low, investor confidence is low. Hard data was also weak in dec19. Manufacturing production fell -2.8% MoM. Mining production fell -2.4% MoM. Electricity production fell -1.6% MoM. As a consequence, Q419 GDP growth will likely come on the weak side of the range. The consensus has now shifted for Q419 QoQ% to print negative. That would mean SOAF technically slipping back into recession territory, after the -0.6% QoQ GDP in Q3. The last time we had a technical recession in SOAF was in Q118-Q218 period.