Bond flight from SA spurs warning of worse to come

Foreign investors’ holdings of South African bonds have dropped to the lowest level in more than a year following a record sell-off since the beginning of May, and a senior Treasury official says there could be worse to come.

Non-residents held 38.9% of government debt as of June 22, down from as high as 42.8% in March, according to Bloomberg’s calculations based on National Treasury data through April and Johannesburg Stock Exchange data for May and June.

Foreigners piled into South African debt in the first quarter on optimism new President Cyril Ramaphosa would undo the economic havoc wreaked by his predecessor, Jacob Zuma. But the flows started dwindling in April before turning into a flood of sales, reaching a net R56.5bn ($4.2bn) since the beginning of May, according to JSE data.

The outflows occurred against the backdrop of a broad sell-off in emerging-market assets sparked by a stronger dollar and rising US rates, which weakened the case for high-yielding investments. They’re a concern because South Africa depends on portfolio inflows to finance its current-account deficit, which swelled to the widest in two years in the first quarter.

And while South Africa is caught in the wave of emerging-market selling, the outflows highlight the country’s vulnerability, according to Tshepiso Moahloli, chief director for liability management at the Treasury. Weak growth, high unemployment and burgeoning fiscal and current-account shortfalls make it less attractive as an investment than some of its peers.

Saving grace

“If investors start looking at each country specifically and we are at a stage where we have low investor confidence and business confidence, the impact can be amplified,” Moahloli told reporters in London on Friday. “Currently, it’s just a broad emerging-market issue. But yes, it is a concern.”

The rand has wiped out all its gains that came with Ramaphosa’s ascent to the presidency and was 1.2% weaker at R13.6015/$ by 17:10 in Johannesburg on Monday. The yield on benchmark government 2026 bonds climbed four basis points to 8.90%, after retreating in the previous three trading days from a six-month high.

South Africa’s saving grace is a local investment community overseeing about R2.2 trillion, as well as a large banking industry looking to shore up capital. Demand from domestic investors has kept a lid on yields, Moahloli said.

Most selling of South African bonds in May was driven by “fast-money” investors cutting long positions in the debt, Morgan Stanley said in a report dated June 21. Index-tracking funds, by contrast, added to holdings, according to Morgan Stanley’s London-based fixed-income strategist Min Dai.

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