A slump in South African dollar bonds has made them the biggest laggards in developing markets this year, reflecting concern among investors that a market-unfriendly coalition government may emerge from next month’s elections.

Holders of South Africa’s eurobonds have suffered a 4.4% loss, a worse performance even than Senegal, where postponed elections shook sentiment. In contrast, the average return for emerging markets in Bloomberg’s sovereign hard-currency index in 2024 is a positive 1%.

South Africans head to the polls on May 29 in the toughest test for the ruling African National Congress (ANC) since it came to power in 1994. Discontent over years of rolling power blackouts and the party’s record in dealing with corruption could reduce the ANC’s share of the vote below 50%, forcing it into partnership with one or more rivals to continue governing.

“South Africa’s weaker performance this year has to do with foreigner unease with our upcoming elections and the potential for an unfavourable coalition outcome,” said Thalia Petousis, a Cape-Town based portfolio manager at Allan Gray.

Investors are most wary of “expensive and populist initiatives” like the proposed National Health Insurance system, or the expropriation of land without compensation advocated by the Economic Freedom Fighters, currently the third-biggest party in parliament, Petousis said.

“South Africa can either ill afford these — or they might be executed ineffectively,” she said in emailed comments. “In short, the market is nervous about the elections.”

One March opinion poll showed support for the ANC dwindling below 40%, with the party losing ground to one founded by former President Jacob Zuma. Such a result would increase the magnitude of any potential selloff, said Carmen Altenkirch, an analyst at Aviva Investors Global Services.

“We will be watching polls very closely in order to determine whether there is a greater risk that the ANC is forced into a coalition with the EFF, which is something that the market isn’t pricing for at the moment,” Altenkirch said in an interview.

In a sign of increasing nervousness in markets, the cost of insuring exposure to South Africa has risen, with credit default swaps climbing 53 basis points so far in 2024. Similar measures for peers have remained relatively flat.

Meanwhile, Citigroup's latest survey of credit-market investors suggests sentiment toward South Africa has deteriorated.

South Africa emerged as the most underweighted country for 29% of survey respondents, with only China — at 55% — ranked as less popular among investors.

“Of all the changes to views on overweight/underweight, the view on South Africa has moved decidedly more negative,” Citigroup analysts including Luis Costa wrote in a note to clients dated April 3.