Fleeing foreign investors worsen South Africa’s deficit problem

While non-residents have offloaded government bonds worth R60.6 billion on a net basis over the past three years, current-account surpluses had tempered the need for portfolio inflows. That’s changing now, and it may soon be necessary for the country to lure back foreign money. That means a weaker currency, rising bond yields, or both.

“The country normally needs to attract sufficient capital inflows to maintain a balance of payments equilibrium,” said Mike Keenan, a fixed-income strategist at Absa in Johannesburg. “Now that the current account is widely expected to move back into deficit territory South Africa may need to entice foreigners to return via a weaker rand and/or higher bond yields.

South Africa posted a current-account shortfall for a second straight quarter in the three months to September, suggesting the annual outcome may swing to a deficit after two years of positive balances.

Outflows from the local bond market gathered pace in 2020 after Moody’s Investors Service followed S&P Global and Fitch Ratings in cutting South Africa’s credit rating to junk, leading to the removal of the country’s debt from global indexes tracking investment-level bonds.

Non-residents’ share of government debt dropped last month to 26%, the lowest since May 2011, from a high of 43% in 2018.

The sell-off has driven yields higher, with the rate on 10-year rand bonds now almost 80 basis points above the five-year average and among the highest in emerging-markets at 10.3%. That may already be an attractive level for some foreign investors as central banks around the globe moderate the pace of monetary tightening.

Unfavourable global conditions due partly to hawkish central banks amid the fight on inflation contributed to the selloff in South African bonds, said Michelle Wohlberg, a fixed-income analyst at Firstrand Bank Ltd.

“Now that the narrative has turned somewhat dovish, we’ve seen renewed interest for interest rate products from offshore investors,” she said. “But there are still a lot of moving parts driving sentiment and investment decisions.”