SA government's rising cost of funding 'presents a challenge' — ratings agency

SA's rising long-term bond yields and the related cost of government borrowing remain a concern, ratings firm S&P Global said in its second quarter economic outlook for emerging markets.

The yield on SA's benchmark 2030 government bond hit a record-high above 13% in March 2020 at the height of the financial crisis triggered by the coronavirus pandemic.

Yields came down as the central bank slashed lending rates and launched a bond-buying programme. But they have started rising again in 2021, to near the 10% mark, as climbing Treasury yields in the US lured away lenders.

“In SA, 10-year domestic currency government bond yields have risen about 70 basis points this year. While less abrupt, the rising cost of funding presents a challenge, given that interest rate payments in SA are already among the highest among key EMs,” said S&P in a release dated March 30.

S&P said this month that the 2021 budget did not focus enough on economic reforms, making a sustained rebound in GDP unlikely. The deficit is forecast to more than double to 14% of GDP in the 2020/21 fiscal year, from 5.7% in the previous year.

Foreign investors have avoided the country's bonds or demanded a high premium, or yield. The central bank said on Tuesday non-residents had sold R74.6bn of bonds in 2020.

Year-to-date, foreign selling of local bonds was R28.5bn, according to JSE data.

The Reserve Bank last week resisted raising lending rates after hikes by other emerging market central banks, saying the inflation outlook was benign. The bank said it had little control over long-term bond yields.

S&P said in the report the increasing divergence between the US rebound and the rest of the world could “force central banks to implement defensive interest-rate hikes” to compensate for the growing yield differential, especially those countries with large fiscal deficits like SA.