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The SA Daily 17 April 2018

SA credit risk priced right

  • In 2017 South Africa’s credit risk (as proxied by SA USD 5yr CDS) was elevated because of idiosyncratic risk, reaching a high of 223 bps in H1:17 due predominantly to the then deteriorating fiscus as well as domestic and policy uncertainty.
  • However, the fiscal measures taken by the NT in the 2018 Budget, as well as SA remaining in the WGBI, a benign global backdrop, coupled with elevated commodity prices, have helped SA credit risk achieve multi-year lows. Credit risk is currently around 157 bps, slightly lower than the 178 bps average for the period 2010-2015 (between the global financial crisis and the reshuffle of SA finance ministers at the end of 2015).
  • We believe that SA’s credit risk is appropriately priced, for now, in light of the increased optimism about the domestic outlook and the benefits from a benign global environment. Further, we think that SA USD 5yr CDS will move broadly sideways; this contributes to our constructive view regarding SAGBs.
  • Should however policy reform and economic growth in SA significantly exceed expectations, we would expect credit risk to pose a modest upside risk to bond yields, but this is not our base case.

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