Top Investor Says Risk Premium on South Africa’s Bonds Is Too High

July 19, 2024

1 minute read

(Bloomberg) — The risk premium on South Africa’s bonds is too high, a fund manager at Fidelity International Ltd. said, a day after President Cyril Ramaphosa laid out a five-year plan to bolster economic growth.

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“There is still too much risk premium embedded in the valuations of local bonds,” said Paul Greer, at Fidelity which has $13.7 trillion under management, blaming doubts over government commitment to fiscal prudence.

“We think there is still room for the local SAGBs in particular to rally further from here. On the macro side we think growth will rerate higher, fiscal metrics will improve and inflation will fall further,” he said.

Yields on benchmark South African government bonds have already dropped by around 125 basis points since Ramaphosa’s African National Congress lost its parliamentary majority in May 29 elections for the first time in 30 years. That forced him to form a multi-party coalition which includes the centrist Democratic Alliance and eight other parties.

The president in his first major policy speech since the formation of the coalition delivered a business-friendly message on Thursday, pledging fiscal discipline, less red tape and massive infrastructure investment.

“The journey ahead will not be straightforward, and we are very likely to see some bumps along the road ahead,” Greer said. “But we are optimistic on the direction of the country from here. The extreme tail risks have been removed.”

JPMorgan Chase & Co. separately recommended buying the South African rand against a basket of the Colombian peso and the Chilean peso.

Finance Minister Enoch Godongwana, speaking in a separate interview, said the new government will now flesh out the details that will “give effect” to Ramaphosa’s five-year strategy.

The president also changed tact on controversial policies that have been criticized by his alliance partners and the finance minister as unaffordable, including converting a stipend introduced for the unemployed during the pandemic into a basic income grant.

“The language of the president is careful,” Godongwana said. He will keep the stipend known “in its present form, which is already on the fiscal framework, until we introduce other income support measures,” he said.

–With assistance from Ntando Thukwana.