South Africa's virus rescue package has bond investors on the run
JOHANNESBURG - There’s just no let-up for the emerging world’s worst-performing debt.
Investors aren’t buying the South African government’s assurance that it won’t significantly increase debt sales to fund a massive economic rescue package.
Yields on government rand-denominated bonds have climbed more than 50 basis points since President Cyril Ramaphosa announced the 500 billion rand ($26 billion) fiscal injection on Tuesday.
To make matters worse, nobody is quite sure how South Africa’s exit from the FTSE World Government Bond Index -- expected at the end of the month -- will affect demand. Foreign investors, meanwhile, sold the country’s debt at the fastest pace in more than a month on Tuesday.
“Concerns over how South Africa will fund the stimulus package and the strain of the lockdown on the economy and tax revenues will continue weighing on government bonds in the months to come,” said Michelle Wohlberg, a Johannesburg-based trader at Firstrand Bank Ltd.
“With the quantum of the WGBI outflows still uncertain, we should see very little buying interest today as investors wait for the noise to calm down before adding new positions.”
The benchmark 10-year government yield jumped 24 basis points on Wednesday to 10.94%, after soaring 34 points on Tuesday. It’s the highest in major emerging-markets after Turkey, and more than five percentage points higher than that of Brazil, rated one level lower by Moody’s and S&P Ratings.
Even before a Covid-19 lockdown that is expected to shrink the economy by 6.1%, according to the central bank, South Africa was saddled with stagnant growth, rising government debt and a weakening currency that made the country’s bonds less attractive to foreign investors. Moody’s cut its credit rating to junk last month, which will result in an exit from the WGBI and other indexes that track investment-grade debt.
The government said most of the rescue package would be financed through re-allocations within the budget, and borrowing from international lenders such as the World Bank, International Monetary Fund and African Development Bank. Still, the extra spending and expected tax shortfalls could push the country’s budget deficit as high as 17.7% of output and debt to 80% of gross domestic product, from around 62%, according to Peter Attard Montalto, head of capital markets research at Intellidex UK Ltd.
Non-residents sold a net 5.2 billion rand of South African bonds on Wednesday, the most since March 12 and bringing outflows for the year to 58.5 billion rand, according to JSE Ltd. data. That is weighing on the rand, which has declined 27% this year against the dollar, the most among emerging-market currencies and eroding returns on the debt for foreign investors.
South African bonds have lost 3.6% for dollar investors in April, the worst performance among 32 emerging markets tracked by Bloomberg and bringing losses for the year to 31%. Developing-nation bonds on average have returned 0.8% this month.