South Africa is in a \u201cdebt-trap twilight zone\u201d 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\u2019s biggest independent fixed-income investor.<\/p>\n
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.<\/p>\n
\u201cSouth Africa\u2019s fiscal-strength score is at its lowest point in decades,\u201d Cape Town-based Futuregrowth, a unit of Old Mutual Plc that manages R194 billion ($11 billion), said in a note to clients.<\/p>\n
\u201cThe inability to arrest the speed at which public-sector debt is accumulated will force the country deeper into this debt trap.\u201d<\/p>\n
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.<\/p>\n
The spread between the generic 30-year and 10-year securities was 227 basis points on Wednesday. That\u2019s a doubling of its forecast before the coronavirus pandemic reached South Africa.<\/p>\n
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.<\/p>\n
Futuregrowth also said:<\/p>\n