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How significant is foreign ownership of SA bonds?

And how much will be affected by a downgrade?

The total size of the South African government bond market is R2.12 trillion. Of that, according to the latest available statistics from National Treasury, foreigners own R781 billion, or 36.9%.

As the table below shows, this foreign ownership has fallen since the highs of late 2017 and early 2018. However it remains higher than it has been for most of this decade.

Foreign ownership of SA government bonds
Date Percentage
December 2011 28.6%
June 2012 32.0%
December 2012 35.9%
June 2013 36.7%
December 2013 36.4%
June 2014 38.0%
December 2014 36.0%
June 2015 34.3%
December 2015 32.4%
June 2016 35.3%
December 2016 36.0%
June 2017 40.5%
December 2017 41.4%
June 2018 40.2%
December 2018 37.7%
June 2019 38.5%
October 2019 36.9%

Source: National Treasury

The average percentage of foreign ownership of South African government bonds between 2011 and 2019 is 35.9%. It was lowest at the start of that period, and peaked at just under 43% in March 2018.

There has been a slight decline in the ratio of foreign holdings this year, but it is not substantial. In fact, up until the end of July, foreigners had been net buyers of local government bonds during 2019.

The Moody’s factor

The foreign ownership figure is significant because of the risk posed by a potential credit downgrade next year. Having cut the outlook on South Africa’s sovereign credit rating to negative, the most likely next step by Moody’s Investors Service is to lower the country’s rating to below investment grade.

Read: SA has three months to defend investment-grade rating

Moody’s would be the last of the major rating agencies to do this, and the move would automatically trigger South Africa’s exclusion from the FTSE World Government Bond Index (WGBI). To be part of that index, a country’s domestic long-term bonds must be rated investment grade by either S&P or Moody’s.

South Africa has been part of the WGBI since 2012. What the impact of falling out of it would be remains highly uncertain.

Index tracking funds and those that are allowed to own bonds in the WGBI would be forced to sell their positions. However, estimates on how much money this represents vary substantially.

The South African Reserve Bank recently suggested that the selloff could be between $5 billion and $8 billion. That is between R73 billion and R117 billion.

Read: Sarb says Moody’s cut could risk $8bn selloff

Intellidex also places the figure at this lower end of the range. It estimates that a downgrade could lead to $5 billion in outflows.

However, the Bank of New York Mellon has put the figure at between $8 billion and $12 billion. That could be as much as R176 billion. Other recent estimates have gone as high as $15 billion, or R220 billion.

Read: This is what awaits South Africa if Moody’s cuts its rating to junk

The impact

This range is significant, because R73 billion would be 3.5% of the total local bond market; R220 billion, on the other hand, is 10.4%. The former may not move the market that much, but if a 10th of South Africa’s government bonds were suddenly dumped, there would be a sharp reaction.

Most analysts seem to think that the higher end of the range is unlikely. That is because a downgrade has been anticipated for so long that it is reasonable to expect that many funds have pre-sold South African bonds where this has been possible.

If that is the case, then the downgrade is already largely ‘priced in’.

Read: Bond fund exodus from SA well underway

However, one cannot ignore that local bonds offer easily the highest yields of any of those in the WGBI, as the Bloomberg chart below indicates. This means it is very difficult for fund managers to be too heavily underweight without risking underperformance at the same time. Some managers may even be tempted to remain overweight because of the returns they are seeing, particularly when some WGBI bonds are offering negative yields.

Source: Bloomberg

The general view, however, is that falling out of the WGBI will in itself only have a small and relatively short-lived impact on local bond yields. It will push them higher, but there will almost certainly be enough appetite among local asset managers to buy whatever foreigners have to sell. There may be a more sizeable impact on the rand, however, as foreigners have to translate whatever they sell into other currencies and that won’t be as easily absorbed.

The greater risk, however, is that the South African government is unable to sort out its finances.

As Jonathan Myerson, head of fixed income at Visio Capital, notes, the market is pricing in that fiscal consolidation will take place within five years.

“The question is becoming whether that consolidation is going to happen –and if it does not start in the 2020 budget, then the issues are much greater than a WGBI exclusion,” Myerson notes.

If the government does not rein in expenditure and halt its growing levels of debt, South Africa is facing multiple downgrades. And that will have much more meaningful implications for the market.

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This 37% of the debt that is held by foreigners is denominated in the local currency, not dollars. The article does not mention the percentage that is dollar-denominated, but I believe that it is about 10% of the total debt.

This is part of the reason why we have not been junked by Moody’s. We are not junk yet, simply because the government has the option of printing the rands to repay the debt. Government has the power to expropriate the purchasing power from citizens, and use it to repay the debt to foreigners. This is a positive factor for Moody’s and a highly problematic factor for us.

The debt will be repaid in some form or other, and devaluation is always the road of least resistance.

The chart is also not completely clear as to currency which may be irrelevant as it is a snapshot. To me it shows that the ANC regime will pay just about any interest rate to borrow money; almost regardless of whether it is within the country’s ability to pay it back, with interest. Very like SAA, Eskom etc.

Scary.

What is the yield on dollar denominated SA government bonds?

Worthwhile to note that the USA has a very large debt problem, as well. It is quite likely that there will be significant printing of money over there to lower the debt or to repay existing debt. Please research for yourself, but I believe that, approximately, half of the USA budget is going to servicing debt. Potential strong currency devaluation is definitely not something unique to the South African Rand.

Difference is USA have the reserve currency. All emerging markets want USD to divest from their own volatile currencies and 99% of world trade happens in USD so their is enough appetite for USD. You cannot print yourself out of debt if you have a currency that cannot be used anywhere except in your own country like the Rand. We have to convert every rand to USD if we want to trade with the rest of the world.

“The greater risk, however, is that the South African government is unable to sort out its finances.”

A sold gold guarantee that they were, are and will never be able to sort their finances out.

To sum up the comments made;-
1. Do not trust Governments (especially the ANC government) with the value of their/your money.
2. Buy gold or any other hard asset?

With a reactive Government like this country has, one gets the impression they don’t care what happens..There seems to be a lack of urgency, no arrests ito State Capture, more and more SOE’s receiving bailouts, trying to keep SAA afloat, introducing a NHP knowing full well it’s poised for disaster, Squirrel is a silent President probably hoping that we in Africa can manage without the World..Tribalism is of course older than democracy, so is grabbing land..As a famous old adage goes “ A blind person who sees is better than a seeing person who is blind“ That kinda sums up our Government,Civil Servants and state of affairs

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