South Africa’s damaged reputation is making foreign investors sell off bonds at high volumes – and the South African Reserve Bank (SARB) says it has done all it can with the tools it has.<\/p>\n
However, domestic failings outside of its control are adding fuel to the fire.<\/p>\n
Following the SARB’s recent monetary policy decision to raise rates by 50 basis points, the SARB held a Q&A session to further explain the current state of affairs.<\/p>\n
When questioned on the recently reported high volume of government bond sales, the SARB said that the risk premium associated with South Africa is contributing to the rise.<\/p>\n
South African government bonds worth approximately R200 billion have been sold, while the rand has experienced a 39% depreciation over the past decade, making it the worst-performing currency among emerging markets.<\/p>\n
“Ten-year bond yields reached a high of 13.78% on the 23rd May, and currently trade at about 12.3%, despite the expected moderation of inflation over the forecast period,” said the SARB.<\/p>\n
Traditionally, investors looking for less risky assets prefer low-yield bonds, whereas high-yield bonds are more risky.<\/p>\n
DFM Global, a fund management firm, recently highlighted that foreign investors are withdrawing their capital from South Africa at an increasing rate due to the country’s volatility and a lack of clear investment incentives.<\/p>\n
The governor of the SARB, Lesetja Kganyago, said: “You cannot hold a lid on a boiling pot forever; if bond yields rise there is nothing you can do to bring it down unless you correct the fundamentals<\/strong>.”<\/p>\n Fundamentals include the country’s fiscal stance, fiscal developments and political developments, which are all playing into the risk premium of South Africa.<\/p>\n SARB said that elevated debt levels, for example, are continuing to contribute to the risk premium and because it continues to worsen – it feeds into the weak exchange rate.<\/p>\n To address such issues, the SARB said that there are tools to do so; however, they are not within the control of the central bank.<\/p>\n If other price setters in the public sector – from electricity to water tariffs – ‘play ball’ in line with inflation and municipalities jack up rates and tax prices, inflation can be curtailed, said Kganyago.<\/p>\n From a central bank perspective, the tool at its disposal regarding inflation is the bank’s policy rate.<\/p>\n