The threat of mass contagion from the Greek debt crisis is undermining the traditional wisdom that, in turbulent times, developed market assets are a safer bet than their emerging counterparts, according to Reuters. While rich countries are grappling with yawning budget deficits and overall debt levels of 100 percent or more of GDP, younger states with more sober debt profiles, such as South Africa, are beginning to appear a more secure bet. Despite earlier worries that the end of ultra-loose monetary policy in the U.S. could slow capital to emerging markets, offshore interest in South African domestic debt -- especially long-dated paper -- has picked up over the last month. The spread between the domestic 30-year bond and its U.S. equivalent has fallen 20 basis points in the past two weeks. "If you look at the European situation, they are getting downgraded all the time. There are even rumours that the U.S. could lose some of its sovereign ratings status as well," said Ion de Vleeschauwer, chief dealer at Bidvest Bank. "You can buy Portuguese bonds yielding more than South African bonds but there's that threat of default, so guys are steering away from developed bonds and trying to find value elsewhere," he added. South Africa's budget deficit stands at 5.0 percent of GDP and its overall debt is around 40 percent of output, making sure its investment grade credit rating remains secure. Moody's said last month South Africa's outlook was stable and in January Standard and Poor's upgraded its view to stable. Such opinions and figures cast Africa's biggest economy in a favourable light to, say, the United States, where a political standoff over a looming government debt ceiling of 100 percent of GDP is leading some to think the unthinkable -- that the world's most trusted lender may renege on its obligations. STABLE CURRENCY Even the threat of returns being eaten up by currency weakness is a risk investors appear to be willing to take. The rand , one of the most heavily traded emerging market currencies, has normally been very volatile but steady dollar-buying from the central bank over the last year has limited the worst of the gyrations, mostly keeping the unit between 6.50 and 7.20 to the dollar. Not has the action limited the rand's gains, which now stand at around 13 percent against the dollar in the past 12 months. As such, an investor can keep a 5-year bond that yields 7.4 percent for six months without loosing too much sleep about a devaluation. Pulling out is also comparatively easy thanks to the absence of currency restrictions. "It is a highly liquid market because South Africa does not have exchange control restrictions," said Colen Garrow, an economist at Brait, a private equity group. "We also don't have withholding tax when foreigners buy securities." At the peak of inflows into emerging markets last year, South Africa last year dismissed the idea of a tax on foreign bond purchases -- such as one imposed by Brazil. RATES LOW FOR LONGER Accommodative monetary policy has intensified the appeal of South African bonds, with the central bank's benchmark rate likely to remain near 30-year lows into 2012 due to the bank's reluctance to take action that might harm a fragile domestic recovery. The benchmark rate fell by 650 basis points to 5.5 percent between December 2008 and December 2010. "I expect this foreign buying to continue as weak growth from abroad finds expression domestically. The market appears to be pricing out expectations of a rate hike in 2011, pushing it out to 2012," said George Glynos of economists ETM.
