SA has experienced notable improvements in its macroeconomic landscape in recent months, resulting in enhanced sentiment and a stronger growth outlook. However, foreign investors are unlikely to flood back to SA bond markets until the middle of next year, Nedbank’s economics unit says.
The SA bond market has seen an exodus of foreign investors since 2017, when ratings agencies S&P Global and Fitch downgraded the sovereign rating to below investment grade, with Moody’s following suit in 2020.
Before the “ratings outbreak” started, nearly 44% of SA’s government bonds were held by foreigners, according to Nedbank, but ratings downgrades, together with political concerns and the impact of Covid-19, saw foreigners reducing their exposure to the SA bond market.
The latest data from the National Treasury shows that just more than 25% of government bonds are held by foreign investors, meaning the government’s liquidity increasingly hinges on local investors plugging the gap.
“We are definitely in a more favourable macroeconomic environment,” Nedbank said, highlighting reduced load-shedding, declining inflation and interest rates, and three months of consecutive petrol price cuts.
These developments have contributed to a more conducive business environment and boosted the confidence levels among consumers, businesses and investors.
“We expect that with a good growth outcome this year — namely, GDP increasing by more than 1%, fiscal consolidation and an indication of further improvements next year — we could see the ratings outlook improving from stable to positive in May next year,” Nedbank said.
However, actual ratings improvements are not expected until the second half of 2026 and will depend on the growth trajectory remaining positive.
“With the ratings not changing, it simply means that foreign investors are not going to flood back into the SA bond market,” Nedbank said. “A lot of things will have to be done right for us to attract these investors back.”
While institutional investors would continue to steer clear of SA until ratings improved, Old Mutual chief economist Johann Els said he expected an uptick in foreign investment in SA bonds in the next six months.
Els said slowing growth, easing inflation and rate cuts in the US suggested that foreign investors were going to be looking for better returns outside the US in the coming months, with SA standing out relative to its emerging-market competitors.
US election
In this environment, SA’s competitive growth potential, stability and lower political risk meant SA bonds would be attractive to foreign investors, Els said.
With US elections taking place next month, Alexforbes chief economist Mpho Molopyane said uncertainty around the outcome could see foreign investors avoiding emerging-market assets in general.
However, Molopyane said “a positive US election outcome, coupled with continued Fed easing and improving SA fundamentals could see foreign interest return” to SA bond markets.
Looking ahead to next week’s medium-term budget policy statement, Nedbank expects SA’s more favourable macroeconomic environment to play a prominent role, given the improved electricity supply, easing inflation, lower interest rates and stable domestic currency.
The group expects gross tax collections will surpass projections made in February’s budget by about R2bn, driven primarily by higher personal tax revenue, with two-pot withdrawals set to create a windfall of about R7.5bn in this financial year.
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