A top investor says South Africa is in a ‘debt-trap twilight zone’

South Africa is in a “debt-trap twilight zone” that will cause of the cost of borrowing over 30 years to sharply steepen in the next year over that of 10-year debt, according to the country’s biggest independent fixed-income investor.

A collapse in tax revenue because of the impact of a coronavirus-related lockdown has exacerbated surging debt levels, with the Finance Ministry saying in June that debt could exceed 140% of gross domestic product within a decade unless action is taken.

“South Africa’s fiscal-strength score is at its lowest point in decades,” Cape Town-based Futuregrowth, a unit of Old Mutual Plc that manages R194 billion ($11 billion), said in a note to clients.

“The inability to arrest the speed at which public-sector debt is accumulated will force the country deeper into this debt trap.”

The spread between 30-year government debt and 10-year government bonds could widen to as much as 300 basis points within a year, Futuregrowth said.

The spread between the generic 30-year and 10-year securities was 227 basis points on Wednesday. That’s a doubling of its forecast before the coronavirus pandemic reached South Africa.

Ten-year inflation-linked bonds are likely to have a yield ranging between 2% and 2.6%, while 30-year inflation-linked bonds could oscillate between 4% and 4.8%, the money manager said.

Futuregrowth also said:

  • Public sector wages may consume 51.3% of tax revenue this fiscal year;
  • The country’s fiscal strength, by its own measure, is at its lowest since 1996;
  • Foreign holdings of local-currency bonds are at their lowest since 2013;
  • Government debt will reach 93% of gross domestic product within three years, according to the fund manager’s forecasts.

Read: South Africa’s move to lockdown level 2 – what to expect

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A top investor says South Africa is in a ‘debt-trap twilight zone’