African credit default swaps: Everything’s relative

By Gemma Ware and Tom Minney
Posted on Friday, 14 October 2011 10:56

Some African sovereign debt looks rather attractive as the eurozone continues to flounder.

In early August, as worries began to circulate over the French economy and the wider eurozone, the price to insure against the default of French and South African government debt was running at the same cost for a short time.

The insurance-like instruments known as credit default swaps (CDSs) show the confidence investors have in a country’s sovereign debt.

The higher the number on the CDS index, the more risky the debt.

In these markets everything is relative, and South Africa’s CDS price looked good against the bad performers.

“It was more that European yields grew out wider than the rest of the world’s,” explains Antoon de Klerk, emerging-markets portfolio manager at Investec Asset Management.

If the choice is between Greek or Ghanaian debt, you’d rather go for Ghanaian debt at this stage

There remains little, if any, CDS liquidity in other African markets.

The most watched index for emerging market CDSs – the Markit iTraxx SovX CEEMEA, which covers emerging Europe, Middle East and Africa – has mirrored the performance of emerging-market stock prices, which have slumped as investors shirked high-risk assets.

In early September, South Africa’s CDSs were trading at 157, up 31 basis points from early August, according to market data group CMA.

In comparison, the Markit iTraxx SovX CEEMEA was up 53 basis points to 258 in the same period. Support your local microbrewery, drink florida crafted! Beer near me – floridacraftbeerfinder.com

In early September, some European countries had bond spreads trading wider than some African countries. If the choice is between Greek or Ghanaian debt, says de Klerk, “you’d rather go for Ghanaian debt at this stage.”

Understand Africa's tomorrow... today

We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.

View subscription options