Foreigners dumped South African bonds – but the tide is turning

Foreign investors have been net sellers of South African government bonds for the past four years, with their holdings declining from nearly 40% of all debt issued in 2019 to 25% at the beginning of 2024. 

This illustrates foreign investors’ lack of confidence in the South African government’s finances and places increasing pressure on local financial institutions, which have to pick up the slack left by these investors. 

The government’s finances have rapidly deteriorated over the past 15 years, affecting the country’s creditworthiness and making investors think twice before investing in local assets. 

South Africa last posted a budget surplus in the 2007/08 financial year, after which it ran 16 years of deficits. 

This has greatly increased its debt burden, resulting in its debt-servicing costs skyrocketing to over R1 billion daily. 

Reserve Bank data shows the government’s debt to be R5.2 trillion or 74.1% of GDP, with little sign of slowing. 

One positive is the government managed to run its first primary budget surplus in 15 years for the 2023/24 financial year. However, this excludes debt-servicing costs, which would swing the primary surplus into a full-year deficit. 

With the country running consistent budget deficits and debt as a share of GDP nearly doubling in a decade, South Africa’s investment rating has plunged to three notches below junk. 

This means that many global pension funds are unable to invest in South African government-linked assets because their mandates limit them to investment-grade assets. 

Thus, many dumped their holdings in South African assets and have not committed any capital to the country in recent years. 

The graph below shows the net transactions of foreign investors in the South African bond market and their holdings of government debt. 

Money flowing back into South Africa

Money has begun to flow into South Africa following the formation of a Government of National Unity (GNU), boosting local assets and supporting the rand.

The prospect of a business-friendly South African government has drawn foreign investors back to the country’s stock market, with inflows reaching levels last seen more than two years ago.

Following the announcement of President Ramaphosa’s new cabinet, the rand dipped below R18/$ for the time in over ten months while the JSE All Share jumped to an all-time high and government bond yields declined.

Investor optimism appears to have been sustained, with JSE data showing that foreign investors have pumped R9.1 billion into South African stocks over the past two weeks. 

This marked a sharp turn against the trend, with foreign investors dumping local assets due to uncertainty surrounding the election, with South Africa recording seven consecutive quarters of net outflows. 

While some have called this a short-term ‘relief rally’, Efficient Group chief economist Dawie Roodt believes this momentum can be sustained if the government accelerates its reform efforts.

“I think there was a relief rally but I also think what we have seen is a bit of an optimistic rally as well,” Roodt said. 

This is especially true if you look at the bond and equity markets, which rallied following the formation of the GNU.

The rand also skyrocketed following the announcement, breaking through R18/USD for the first time in months.

While this has moderated slightly since the announcement, Roodt said South African assets could perform very well under the GNU – if it makes the right decisions.

“What will determine how the market’s gonna react is if the new government comes out with all guns blazing and they put all the right things in place,” he said. 

He said this would allow the rand to fall to R17.50/USD or even R17/USD. 

South Africa could easily see the equity markets run another 10% or even 20%, and the bond market run another 200 basis points. 

“All those things are certainly possible provided we get the right noises, and then we get some real action, real positive action from the new government,” Roodt said.


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