The sharp rally in SA government bonds since the general election has in an important sense been a vote of confidence in the new government of national unity (GNU). Foreign investors had been net sellers of our local currency bonds. Now they are coming back into the market. That’s helped to support a rally which is tangible evidence of what SA stands to gain if markets believe it can deliver better economic and fiscal outcomes.
With bond yields down by about 100 basis points from their pre-election highs, the government should in theory benefit from lower borrowing costs. So too should the private sector, whose longer-term borrowing tends to be priced off the government bond curve.
Lower borrowing costs would certainly be a boon for the government. The interest costs on the ballooning debt burden have been the fastest-growing item of government spending in recent years, with the cost of servicing debt now consuming R1 of every R5 the government collects in tax revenue. That crowds out other public spending on items such as infrastructure or policing.
But it’s premature to expect any easing of the interest burden. Much of the government’s borrowing is long term. Indeed, SA’s government borrowing has one of the longest maturities globally, at about 12 years. That’s a positive because it means government debt doesn’t roll over and have to be renewed too often.
It keeps the so-called refinancing risk low and that helps to protect SA from the risk of debt distress or debt default if markets turn against it. It means it takes a while for the government to feel the pain when borrowing costs go up. But it also means it takes a good while for it to feel any meaningful benefit when borrowing costs go down — possibly as long as four years. To illustrate the point: the government plans to borrow about R400bn of new money on the market in the current fiscal year, which is a lot. But it is only a small fraction of the R5.2-trillion of debt already on the books, issued at whatever the bond yields were at the time.
It’s also worth keeping the recent rally in perspective. At about 9.6%, the yield on the 10-year government bond is comfortably below the double-digit levels it hit as the “country risk premium” spiked before the election. But the pricing out of that risk is all that’s really happened — bond yields now are about where they were in January. They’ve been helped by global factors, such as the prospect of US rate cuts. And the 20- and 30-year bonds are still well into double-digit territory, at more than 11%, despite the rally.
Investors remain sceptical about SA’s long-term prospects, even if they are more optimistic in the short to medium term. In particular, there is still scepticism about the government’s ability to cut its debt burden to sustainable levels and keep it there into the future. The government has shown in the past four years that it can deliver on its promises of fiscal consolidation, and in the latest year recorded its first primary fiscal surplus since before the 2008-09 global financial crisis. But it will take time and tough decisions for SA to rebuild its credibility with lenders and investors, and to cut its borrowing costs to sustainably lower levels.
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