South African bond curve steepens as finances deteriorate

Foreign investors have recently offloaded R5.1 billion worth of South African bonds, according to data from the Johannesburg Stock Exchange. This significant selling of local bonds in the week ended September 15 starkly contrasts with net purchases of R4.7 billion during the same period the previous year. Amid mounting worries over South Africa's fiscal situation, where government revenue is expected to fall short of projections and spending pressures aimed at reigniting economic growth are intensifying, the bond market is sending clear signals about investor sentiment towards the South African economy. Speaking on CNBC Africa, Mandisa Zavala, Head of Asset Allocation at Alexforbes, emphasized the growing concerns reflected in the bond market. Zavala noted that as a bond investor, the primary concern is ensuring the return on investment, particularly as South Africa's fiscal challenges loom large. She highlighted how recent discussions from the National Treasury involving consolidation efforts have sparked some positive sentiment, but the high inflation environment and labor negotiation dynamics remain significant hurdles. These factors contribute to a sense of uncertainty and potential rocky road ahead for South Africa's economy. The association between South Africa's bond market performance and broader emerging markets turmoil was also discussed during the interview. Zavala highlighted the correlation, noting that South Africa's liquidity makes it vulnerable to external market forces. With global interest rates rising, South Africa's appeal diminishes compared to developed markets, impacting investor decisions. Ongoing economic reforms and efforts to instill confidence in local assets are deemed crucial to mitigating foreign investor concerns, particularly in volatile global conditions. Regarding investment strategy, Zavala outlined the challenges of balancing risk and return in the current environment. She suggested that the most value for clients lies in the middle to the end of the yield curve, where risk is somewhat mitigated while still providing adequate compensation. Assessing various risks such as currency and sovereign risk premiums, Zavala indicated that aiming for a yield around 11.5% is considered a neutral position, offering a balance between risk and reward. In light of these insights, it is evident that the South African bond market's recent volatility underscores deep-seated apprehensions about the country's fiscal trajectory and economic outlook. As global market pressures and domestic challenges converge, strategic investment decisions and government policy responses will play a crucial role in navigating these uncertain times.