In a tense global bond market, growing concerns about South Africa’s fiscal stability have escalated, pushing the government yield curve to its steepest point in a year.
With the economy battered by severe power outages, an unexpectedly high government wage increase, and falling short of tax revenue targets, bond investors are expressing apprehension that the National Treasury might need to escalate bond issuance. This worrisome trend coincides with rising global yields, diverting investment away from emerging markets.
This strain is particularly evident in long-term debt. The gap between 2026 and 2044 bonds has surged by 65 basis points this year, reaching 345 basis points due to soaring yields on the latter securities.
Presently, South Africa conducts weekly auctions of nominal bonds totaling 3.9 billion rand ($211 million). Earlier this year, the South African Reserve Bank sounded the alarm over domestic investors’ growing reluctance to absorb government debt. Even though August typically witnesses lower demand for government bonds, this month’s average bid-to-cover ratio of 2.4 is the weakest for August since at least 2019, according to Bloomberg data. At the recent auction, demand for 2044 notes was merely 1.7 times the offering, contrasting with a 2.7 ratio for 2032 securities.
Rand Merchant Bank analysts remarked, “Long-term bonds have grappled with diminishing demand, reflecting South Africa’s economic and fiscal uncertainties. The National Treasury is likely to struggle in auctioning long-duration bonds until substantial improvements are made on these fronts. External factors siphoning capital away from emerging markets further compound the demand challenge.”
In comparison to its emerging-market counterparts, South Africa’s local bonds have significantly underperformed this year, resulting in a 7.2% loss for investors in dollar terms. In contrast, rival bonds have averaged a 1.6% return.
Any potential adjustments to bond issuance strategies are expected to be revealed during Finance Minister Enoch Godongwana’s medium-term budget presentation in October. Godongwana had earlier flagged adverse shifts in the nation’s fiscal position back in May.
Danelee Masia, an economist at Deutsche Bank, has projected a fiscal year revenue deficit of 55 billion rand and an expenditure overrun of approximately 20 billion rand. Masia suggests, “The National Treasury could bridge a deficit of up to 80 billion rand. However, this relies on a more favorable global environment, which remains the most significant risk to the issuance outlook.”
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24th August , 2023
Delino Gayweh
Serrar Financial Analyst
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