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Cape Town – The hike in bond yields caused by President Jacob Zuma’s removal of Pravin Gordhan and Mcebisi Jonas from their Finance ministerial posts and the subsequent downgrade to junk status will result in South Africa paying more for its high debt costs.
That is the warning from Anchor Capital chief investment officer Sean Ashton on Tuesday, who told Bloomberg in a video interview that the country’s debt costs have risen as a result of the bond yield increases in recent days.
“The move in bond yields in the past few days means that our interest borrowings and servicing expense on that debt is an extra R1.5bn this year,” he said.
Treasury will borrow R149bn this year to fund government spending plans and will pay R162.4bn in debt costs to pay off the debt it has already accumulated, which is R2.2trn.
The R1.5bn increase will mean South Africa must now pay off R165bn in debt costs this year.
“To put into perspective, that is 10% of the increase in personal income taxes, which was passed in the recent national budget, so it’s a significant hit,” said Ashton.
WATCH: Bloomberg interview with Anchor Capital chief investment officer Sean Ashton
Bond yields could double in 10 years - Ashton
Ashton explained foreign investors own about 35% of the local bond market.
“We're probably yielding in real terms about 3%,” he said. “We are still a better investment grade than Brazil (which has a yield of about 6%), but we are headed in the wrong direction.”
“The key question becomes, if S&P and Moody's both downgrade the local currency rating to junk rating, that then means that South Africa perhaps gets exited from the Citi Bank world government bond index and that could well mean triggered selling of bonds by foreigners.
"We could easily see yields spike to 10.5% at the long end of the curve in that event in terms of 10-year duration," Ashton said.
“We have reached the critical juncture in South Africa,” he said of the recent changes at Treasury. “It called into question the integrity of Treasury, which was previously sacrosanct.”
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