Foreign ownership of South African government debt is declining, but that’s not necessarily a bad thing.
Non-resident holdings of the country’s bonds dropped to 38% at the end of December, from a high of 43% in March, according to National Treasury data.
Africa’s most-industrialized economy relies on portfolio inflows to help finance a persistent current-account deficit.
Foreigners have been more than happy, historically, to buy in as real rates on South African government debt are attractive – among the highest in investment-rated developing nations.
But significant foreign ownership has also meant that any risk event can quickly turn inflows into outflows, as seen last year.
Foreigners sold a net R57.5 billion ($4.2 billion) of the debt in 2018, the most in a year since Bloomberg started compiling the data in 1996.
The good news is that lighter foreigner positioning provides a buffer to the risk of a downgrade by Moody’s, according to Guillaume Tresca, a senior emerging market strategist at Credit Agricole, in a note to clients.
Moody’s is scheduled to reassess the country’s credit rating at the end of the first quarter, and again in November. It’s the only major rating agency that still has South Africa at investment grade.
A drop into junk could lead to the exclusion of South Africa from Citigroup’s World Government Bond Index and to an estimated $6 billion to $7 billion of outflows, Tresca said.