Investor sentiment in South Africa has taken a notable downturn as concerns mount over the potential for a severe budget deficit, according to a recent survey conducted by Bank of America Corp. The looming prospect of a larger-than-expected deficit on November 1 has raised apprehensions, with 82% of the 11 local fund managers surveyed this month believing that the country’s Treasury will be compelled to increase borrowing.
This growing risk has prompted more investment funds to steer clear of South African debt, despite the prevailing consensus that the bonds are undervalued. John Morris, a strategist specializing in South Africa at the bank, expressed this sentiment in a recent note. The survey revealed that a mere 18% of the participating managers maintained a bullish outlook on local bonds over the next 12 months, marking a significant decline from the 57% reported in July.
Last week, a government official disclosed that tax revenue has fallen well short of targets, intensifying concerns that the government may have to flood an already saturated market with increased bond issuance. In response to these fiscal challenges, South African bonds have continued to decline, with yields on 10-year notes rising for the seventh consecutive day.
The pressure on South African debt has been building since February, when the government signaled its intention to boost borrowing in the coming years to fund a debt-relief plan for Eskom Holding SOC Ltd., the beleaguered state-owned electricity company.
As South Africa navigates these fiscal headwinds, investors and policymakers alike will closely monitor developments in the nation’s financial landscape.
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September 18, 2023
Delino Gayweh
Serrari Financial Analyst
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