Business Maverick: South African Assets Signal Rising Anxiety as Election Nears

President Cyril Ramaphosa needs a strong mandate to push through fiscal and policy reforms in the face of opposition from factions within his party. But while a convincing majority may give assets a brief boost, the difficulty of the road ahead is making investors wary.

Volatility measures leave no doubt that rand traders see the election as an immediate, two-way risk. One-week implied volatility for the rand against the dollar has climbed above longer-term measures for the first time since March, and is now higher than any other emerging-market currency including the beleagueredBearish bets are also rising.

While the options market indicates anxiety over the election itself, bond yields suggest investors are also concerned about long-term prospects for the economy. South Africa’s yield curve has steepened to the widest this year as the rate on 10-year securities rose more than that on two-year bonds. While this is partly due to an increase in longer-dated issuance, it also reflects concern about the implementation of much-needed policy reforms to boost the economy.

Hard-currency bonds also signal worries over the fiscal outlook post-election, according to ING Groep NV. Yields on South Africa’s benchmark dollar securities are trending lower, but are about 50 basis points higher than those of junk-rated Brazil. While there could be a near-term rally for the debt after the vote, the medium-term outlook is clouded, said Trieu Pham, a London-based emerging-markets strategist at ING.

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