Rand, SA bonds show investor nerves ahead of budget

South African Finance Minister Enoch Godongwana has his work cut out to calm frayed investor nerves over the country’s outlook, if rand and bond movements are anything to judge by.

As Godongwana prepares to present his medium-term budget on Wednesday, South Africa’s local-currency bonds are in retreat. They have lost 3.1% over the past week in dollar terms, compared with an average decline of 1% across emerging markets, with only Colombian debt faring worse.

Foreign investors have sold R7.9 billion of South African debt in that time — their heaviest disposals since July. Yields on benchmark debt are near levels last seen at the height of the pandemic in 2020, as is the rand-dollar exchange rate.

The currency and South African local debt proved resilient earlier in the year, with the rand depreciating at a slower pace than most of its peers against the greenback. But a mix of global risk aversion and an increase in domestic threats have caused a slide in the past week.

Persistent rolling blackouts are clouding prospects for a recovery in Africa’s most-industrialised economy. Meanwhile, the National Treasury’s commitment to cap spending is running into demands from government workers and employees at state-owned companies for higher pay than the increases set aside for them.

Godongwana is also expected to give an update on the government’s plans to take over some of the R396 billion debt at Eskom Holdings as it seeks to place the struggling state power company on a sustainable footing.

Nishan Maharaj, head of fixed interest at Coronation Asset Management, said the minister’s speech would be scrutinised for how it addresses big expenditure items such as Eskom. While global sentiment has weighed on the rand and South African bonds, Wednesday’s presentation “does introduce further uncertainty given the expenditure demands on the fiscus,” he said.

For Mike Keenan, a fixed-income strategist at Absa Group in Johannesburg, weakness in South African local-currency debt may be explained by market perceptions of the country’s looming borrowing requirements.

“We suspect that investors share our views that issuance will be kept on hold in the current fiscal year,” Keenan said. “However, investors will be eager to see if National Treasury ultimately needs to upwardly revise the borrowing requirement in the outer years on the back of increased SOC assistance.”