Foreigners are dumping SA bonds as junk status looms

Investors have been dumping South African government bonds at a rate of almost R2 billion ($132 million) a day in August.

Read: The market has already downgraded South Africa to junk 

With issuance increasing and a downgrade to junk a looming possibility, non residents have sold a net R14.4 billion of the debt in August so far, according to JSE data compiled by Bloomberg. That’s an average of R1.8 billion a day. The sales have wiped out inflows at a time when the country needs foreign investment to close a current-account deficit that was equivalent to 2.9% of gross domestic product in the first quarter.

The government increased the amount of local-currency debt sold at weekly auctions by 37% last week to help pay for a R128 billion bailout for Eskom, the state-owned electricity company. That will push up borrowing and widen the budget deficit, placing the country’s last-remaining investment-grade rating at risk. Moody’s Investors Service, which rates South Africa’s debt at Baa3, is reviewing its assessment in November.

Foreign ownership of South African government debt fell to 37.9% at the end of July, the lowest level this year, from as high as 42.8% in March 2018, according to National Treasury data. Foreigners are exiting despite yields that are among the highest in emerging markets, suggesting they’re worried a downgrade to junk would see the nation’s bonds kicked out of indexes that track investment-grade debt, such as Citigroup’s World Government Bond Index.

Though foreign ownership is already the lowest this year, the selloff has continued unabated. Inflows have turned into net outflows of R3.2 billion for the year in August — even at a time when a world awash with negative yields is fuelling demand for riskier assets such as emerging-market debt.

In dollar terms, South African local-currency bonds have underperformed all major emerging markets in August except Argentina’s. Yields on benchmark government securities have risen 111 basis points this month, while the rand has depreciated 5.5% against the dollar, further eroding returns for foreign investors.

© 2019 Bloomberg L.P.