Alarm bells ring as local investors cool on South Africa’s debt

By Robert Brand & Colleen Goko Bloomberg Opinion

SouTh Africa’s reliance on deep local markets to finance most government borrowing is no longer a given.

Domestic investors are demanding ever-higher yields as foreigners pull back from the market, just as the National Treasury gears up to refinance almost 1 trillion rand ($53 billion) of debt over the next three years. That’s raised alarm bells at the South African Reserve Bank, which warned last month that the growing reluctance from domestic investors to continue absorbing government issuance could drive borrowing costs even higher.

The average yield for 10-year bonds sold at the government’s weekly auction has climbed to 11.27 percent, compared with 10.2 percent five years year ago, according to data compiled by Bloomberg. In that time, domestic funds, banks and insurers absorbed about 2 trillion rand of government bonds, boosting their share of the debt to 75 percent from 58 percent, according the Treasury data.

“It is difficult to see them absorbing another 1 trillion rand in the coming three years,” said Rashaad Tayob, the Cape Town-based head of fixed income at Foord Asset Management, whose Abax Balanced Prescient Fund has outperformed nine out of 10 peers over the past three years. “Allocations to bonds are higher everywhere, and the ability to buy more is constrained.”

Rising borrowing costs along with stagnant economic growth are complicating the government’s pledge to reduce its budget deficit and curb debt. A 254 billion rand ($14 billion) bailout for stateowned power company Eskom Holdings SOC Ltd. means government debt will probably peak at 73.6 percent of GDP in fiscal 2026—a higher level and three years later than previously expected. Debtservice costs—the fastest-growing expenditure line item for about a decade—will increase to almost 20 percent of main-budget revenue. Failure to consolidate debt could see the country’s credit rating slide deeper into junk.

Weak demand from foreign investors for new government bond issuance is placing a greater burden on the domestic market, and marks a “structural shift” considering the significant increase in government borrowing over the past five years, the Reserve Bank said in its Financial Stability Review last month.

“It raises concerns about the capacity of South African investors to continue absorbing new issuances of government bonds in future,” the central bank said. “As local participants increasingly step in to absorb the declining appetite for new issuances by non-residents, this raises financial stability concerns regarding market liquidity, increased volatility and higher domestic government bond yields.”

The government is concerned about outflows from the bond market though the rise in domestic holdings “demonstrates the depth of local financial institutions,” the National Treasury said in an e-mailed response to Bloomberg’s questions.

It’s considering its funding mix to help limit borrowing costs as debt comes due for redemption.

“Higher interest rates will result in higher debt-service costs and debt levels,” the National Treasury said. “To mitigate the refinancing risk as a result of high redemptions, government will determine the best mix of debt instruments and maturities to finance the borrowing requirement, continued from A14 defense and missile development.

Israel sent high-level officials to Moscow in May asking Russia to refrain.

The growing potential for an Israeli strike has unsettled others in while minimizing refinancing risk, currency risk and overall borrowing costs.”

Rising borrowing costs along with stagnant economic growth are complicating the government’s pledge to reduce its budget deficit and curb debt. A 254 billion rand ($14 billion) bailout for state-owned power company Eskom Holdings SOC Ltd. means government debt will probably peak at 73.6 percent of GDP in fiscal 2026—a higher level and three years later than previously expected. Debt-service costs— the fastest-growing expenditure line item for about a decade— will increase to almost 20 percent of main-budget revenue. Failure to consolidate debt could see the country’s credit rating slide deeper into junk.

Faltering demand

A L SO contributing to faltering demand from local investors was an amendment last year to prudential rules, allowing pension and mutual funds to invest as much as 45 percent of their assets abroad, up from 30 percent previously. That further limits the incentive for local funds to buy domestic bonds, said Foord’s Tayob.

To be sure, demand at the most recent bond auctions has improved as yields near the highest since the pandemic attracted buyers. Outflows have also eased, with foreign investors net buyers of the bonds to the tune of 3.4 billion rand last week, according to JSE Ltd. data. As inflation moderates and global interest rates stabilize, demand for South Africa’s debt may improve, said Mike Keenan, a fixed-income strategist at Absa Group Ltd.

“Even though the debt pile is high, we believe that National Treasury will continue to service its debt over the coming years, partly because it has become more flexible with its funding mix,” said Keenan, who sees the 10-year yield falling to around 10.8 percent by year-end, from around 11.89 percent on Monday.

But any more political upheaval, such as the recent diplomatic spat with the US over South Africa’s alleged arms supplies to Russia, and ongoing economic challenges including a power crisis and transport hurdles will keep borrowing costs elevated, said Nishan Maharaj, a portfolio manager at Cape Town-based Coronation Asset Management, which oversees about 623 billion.

“They will be able to refinance, however the cost of that refinancing will be well above nominal GDP, and probably lead to a worsening of the fiscal dynamics,” Maharaj said. “South African bonds trade at a level that encompasses quite a bit of risk premium. With assistance from Prinesha Naidoo and Monique Vanek / Bloomberg the region. Until last year, Saudi Arabia suffered a series of drone and missile attacks on oil and other facilities that were claimed by Iranian-backed Houthi militias in Yemen.

Saudi-Israel prize

THE Saudis saw a China-mediated deal with Iran as a way to “reduce tensions with their neighbors and focus

Dr. Jesus Lim Arranza MAKE SENSE

IN the Declaration of Principles and State Policies of the 1987 Philippine Constitution, Section 4 states: “The prime duty of the Government is to serve and protect the people.”

This provision is enshrined in specific laws intended to protect the people’s welfare. One such law is the Consumer Act (Republic Act 7394) that sets quality standards for critical products to weed our substandard materials being sold in the market—especially construction materials—that put people’s lives and properties at risk.

Republic Act 7394 was enacted “to protect the interests of consumers through the promotion of public health and safety measures, and the prevention of deceptive and unfair acts of unscrupulous businessmen.”

Apart from setting out quality guarantees that businesses must provide to their customers, the Consumer Act was created to do these tasks:

To develop and provide safety and quality standards for consumer products, including performance or useoriented standards, codes of practice and methods of tests;

To assist the consumer in evaluating the quality, including safety, performance and comparative utility of consumer products;

To protect the public against un- reasonable risks of injury associated with consumer products;

There’s a sense of urgency to resolve the stalemate in the implementation of quality standards on flat glass, particularly at this time when we are seeing abnormal weather patterns due to climate change, and—as what experts have been saying—the imminence of, God forbid, The Big One.

To undertake research on quality improvement of products and investigation into causes and prevention of product-related deaths, illness and injuries;

To assure the public of the consistency of standardized products.

As chairman of the Federation of Philippine Industries, I am naturally often asked about my views regarding quality standards. And just last week, I shared in this column my opinion on the resolutions issued by Makati and Pasay City courts enjoining the Department of Trade and Industry (DTI) from implementing the quality standards on glass.

As a backgrounder, a new policy detailing the standards on flat glass was issued to enhance consumer protection. Unfortunately, its implementation was stopped because of the court injunctions. The Office of the Solicitor General, as DTI’s legal counsel, filed a petition to lift the injunctions by the two courts. But after over three years, the courts have yet to issue a resolution on the OSG petition asking them to lift the injunctions. This development practically makes the country’s flat glass market an unregulated sector, despite DTI’s issuance of mandatory standards.

The Office of the President took cognizance of my column and promptly referred the matter to the DTI.

I am deeply pleased by the quick action of Malacañang, as I am sure they are also fully aware of the magnitude of potential risks being posed by an unregulated flat glass market.

There’s a sense of urgency to resolve the stalemate in the implementation of quality standards on flat glass, particularly at this time when we are seeing abnormal weather patterns due to climate change, and— as what experts have been saying— the imminence of, God forbid, The Big One.

Essentially, in my opinion, this is a case of the courts forcing the government to abandon its constitutional duty to protect the citizens.

Every day that these restraining orders linger, I fear for the safety of the general public. Everyone should keep in mind that the court injunctions do not only affect the manufac- turers and importers of flat glass who are the main protagonists in the case.

I need to reiterate my view on product standards—governments all over the world are imposing them to protect their citizens from the perils associated with the use of substandard materials. This is not about favoring one businessman over the other. The quality standards apply to both the manufacturers and the importers.

Let me pose this question (actually, out of a lingering fear), what if due to bad weather or an earthquake, a substandard glass panel from a building or a house was shattered and fell on people, in the process hurting, or worse killing, them? Whose fault is it going to be—the government’s, the courts’, the importer’s or manufacturer’s?

Should the families of the victims blame the state for reneging on its duty to protect them; the courts for issuing the restraining orders and letting them linger this long despite the exigency of the matter; or the manufacturer or seller of the substandard glass panel?

I’m sure we all have our own opinions on this, whether they are based on statutes or plain common sense.

In the meantime, while the matter is on a standstill, the public is at risk and the state—or at least the Executive Branch—cannot do anything about it.

Dr. Jesus Lim Arranza is the chairman of the Federation of Philippine Industries and Fight Illicit Trade; a broad-based, multisectoral movement intended to protect consumers, safeguard government revenues and shield legitimate industries from the ill effects of smuggling.

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