Record Demand at South Africa’s Debt Sale Defies Budget Risk

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Record demand at South Africa’s weekly sale of government debt suggests the lure of relatively high yields still outweighs investors’ concern about the country’s fiscal path.

Just weeks before Finance Minister Tito Mboweni’s key budget presentation to lawmakers, primary dealers placed orders for 32.5 billion rand of debt ($2.2 billion), or 4.9 times the 6.6 billion rand on sale. That dwarfs the 3.7 bid-to-cover ratio at last week’s auction, also a record.

Mboweni’s plan to curb government debt, set to peak at more than 95% of gross domestic product in 2026 according to government forecasts, will be put to the test by state-owned entities which still need funding, as well as the roll-out of coronavirus vaccines which will require a re-prioritization of already scarce funds.

“I don’t think any of this is really new; it’s the same old structural problems of South Africa,” said Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Asset Management Plc in London. South Africa’s debt remains attractive because of the “very high real yields in comparison to peers, given that inflation is at the lower end of the South African Reserve Bank’s target,” he said.

Record Demand at South Africa’s Debt Sale Defies Budget Risk

While the average yield on developing-nation local-currency bonds climbed to 3.7%, the highest since November, yields on South Africa’s benchmark notes have dropped to 8.54%, the lowest since April 2018.

Yields on hard currency bonds, on the other hand, are creeping up after joining a global rally in December following Joe Biden’s presidential victory in the U.S. The yield on South Africa’s dollar debt maturing in June 2030 has climbed 36 basis points to 4.55% this year.

“For the next month, I would expect domestic drivers to be more in focus again,” said Trieu Pham, a London-based emerging markets strategist at ING Bank NV.

©2021 Bloomberg L.P.

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