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South Africa’s first current-account deficit in years may need to be plugged by foreign investors, who will likely demand a weaker rand and higher yields before they return to the local debt market.
While non-residents have offloaded South African government bonds worth R60.6 billion (US$3.6 billion) on a net basis over the past three years, current-account surpluses had tempered the need for portfolio inflows.
That’s now changing, and luring foreign investors back is likely to come at a price.
“The country normally needs to attract sufficient capital inflows to maintain a balance of payments equilibrium,” said Mike Keenan, a fixed-income strategist at Absa Group in Johannesburg. “Now that the current account is widely expected to move back into deficit territory South Africa may need to entice foreigners to return via a weaker rand and/or higher bond yields.”
South Africa posted a current-account shortfall for a second straight quarter in the three months to September.
Analysts still expect the country to have run a tiny surplus for the full year 2022, but to swing to deficits of 1,2 percent this year and 1,8 percent in 2024, according to estimates compiled by Bloomberg.
Outflows from the local bond market gathered pace in 2020 after Moody’s Investors Service followed S&P Global and Fitch Ratings in cutting South Africa’s credit rating to junk, leading to the removal of the country’s debt from global indexes tracking investment-grade bonds.
Non-residents’ share of government debt dropped last month to 26 percent, the lowest since May 2011, from a high of 43 percent in 2018.
The selloff has helped push yields higher, with the rate on 10-year rand bonds at 10,3 percent, almost 80 basis points above the five-year average and among the highest in emerging markets. — Bloomberg
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