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Exploding interest payments? Blame Zuma

Has SA decoupled from financial reality? The markets seem to think so.
If the rand had stayed close to the average emerging market currency, everything from fuel to chicken and credit would be cheaper today, says the author. Image: Waldo Swiegers, Bloomberg

Financial markets are great indicators of a country’s economic health and future growth and wellbeing of its citizens, just like smoking and exercise are for humans.

It seems that South Africa’s financial indicators have decoupled from those of the rest of the emerging markets. Emerging markets are larger developing countries that are closing the gap between themselves and the advanced economies.

Depending on the data set used, the number ranges from 23 to 40 countries whose economies are growing and catching up on the 39 advanced countries in the world. The GDP they represent is about 40% of the world total, while advanced economies produce a similar amount and the other 100-plus countries make up less than 20% of the world economy.

Government’s more costly borrowing hammers services

Firstly, South African government long bonds have decoupled; this happened slowly at first, but during December 2015 they really separated from the average emerging market bonds.

Read: How significant is foreign ownership of SA bonds?

During President Thabo Mbeki’s last term, the average premium South Africa paid was 1.6% (163 basis points). Since that fateful December in 2015, when then-finance minister Nhlanhla Nene was fired, the average bond premium SA pays has increased to 3.7% (366 basis points). Lately, SA rates are over 4% more than the emerging market average as tracked by the US Federal Reserve.

That means government now pays an interest rate that is over 400 basis points higher than the average rate. On the current total SA debt of R3.2 trillion this translates into about R130 billion more in interest than the average emerging market country.

Taxes must increase, or government spending must decrease.

Add the fact that Eskom bonds carry a close to 600-basis point premium and other state-owned enterprises also pay a premium, and SA pays about R170 billion a year more. That increases the price of electricity, transport and of course government services.

Interest is the fastest growing item in the government budget and is forecast to be 4.8% of GDP by 2024 or 20% of all tax revenue.

These are government forecasts and are probably conservative, as the slowing economy means higher budget deficits and more debt, and probably higher bond yields.

Read: Drowning in debt and much more to come

If Moody’s downgrades SA then this is where much of the pain will be.

Decoupling No 1: SA long bond premium more than doubles since December 2015

Source:, US Federal Reserve Bank, SA Reserve Bank

The long, slow detachment of the rand

A little longer in the making, but the rand has also detached from the rest of the emerging market currencies. While Argentina and Turkey have done worse than SA, the fact is that our currency has, since the end of the commodity boom, fallen out of bed.

This is not only a function of government finances but also of the current account which has remained in the red for more than a decade. But again the pain increased during 2015 and SA never fully recovered despite a smaller current account deficit.

Read: Rand weakens as power cuts weigh

Interestingly, since that fateful December, the net portfolio outflows have averaged R10 billion a month. If the rand index stayed close to the average emerging market currency, the price of fuel would have been about R3 cheaper today and the cost of maize, chicken and so on would have been lower; I estimate that the prime rate would have been about 50 to 100 basis points lower, as inflation would have been lower as well. Eskom’s coal contract price may also have been lower.

Decoupling No 2: The rand detaches

Source:, JP Morgan

The JSE gets cheaper when compared with our peers

Since December 2015 and in the run up to the day Nene was fired, the JSE has never kept up the pace.

If the JSE had kept pace the total value would be about R3 trillion higher today and every one of the 12 million citizens with retirement savings would be at least 10% if not 40% better off depending on their risk profile.

Emerging markets have on average done 64% better than the JSE since 2010, but most of the non-performance took place after 2015.

Yes, think of the extra confidence from here right into the heart of the private sector. Fewer foreigners would have sold, while more would have brought SA companies, leaving 12 million people richer at least.

This is of course also painful for directors of SA companies and senior managers who get less for their stock options. The taxman also got less in capital gains taxes and the like. Maybe the JSE missed out on a few listings while every financial publication was obliged to share the sad news of SA Inc being a laggard.

Of course, the above is not only due to the firing of a minister but also corporate governance and the underperformance of the economy generally due to other factors.

Decoupling No 3: SA equity has not been rewarding to hold

Source:, MSCI

The short term sadly looks very bad. A downgrade will impact bonds negatively while a further downgrade will also play a negative role (slightly less so, but still).

With Eskom on the brink the recovery may never quite happen. But if SA does fix Eskom and government’s ability to service SA improves, the recovery will be great and the potential is massive. I suspect that even small recoveries will be cheered. Headlines to that effect appear often as we are optimists by nature.

Read: Finally, a credible plan to fix Eskom

However, a full recovery from Eskom and debt traps is by no means even a 50% certainty. In fact it is far less. Partial fixes and sticky tape I see everywhere, but nothing big and sustainable

In my opinion it would be wise to hedge your bets and diversify a great deal, and of course if you go to the post office right now you will get an excellent yield that will pay a handsome interest rate.

For business however, capital will remain expensive and that will also impact future growth.




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LAG HARDOP – SA is not an emerging market – It is a collapsing market and will join Zim, DRC and Venuzuala in that elite group soon.

And it will not get any better in many years to come but definitely only worsen.

Mr. Zuma is still not in jail, unbelievable.

What happened to the VBS money? has anyone followed up with EFF?

Well done, and a great and well-reaserched article Mike Schussler – on your birthday!

My view has always been that most people investing are in totally different categories and phases in their lives. What happened to the old-fashioned methods of investment advisers that made predictions for the – short, medium and long terms?

The biggest single problem today for most pensioners is that besides the RA market – their options are very limited – ”time decay” destroyed all the ”intrinsic value” opportunities over many years of bad investors/market research development and advice.

Analysts like Magnus Heystek are forever beating this ”offshore investment – uber alles !

A long-term investment usually offers a higher probability of maximizing your return over a 10-year period, rather than bringing you a high return in just a few years. … Examples of short-term investments include money market funds, certificates of deposit, and short-term bonds.

Well I guess Magnus is saying “The world is your oyster”

It could be worthwhile having a look at how many JSE top 40 companies had some sort of a “snotklap” over the past 5 years for various reasons compared to the previous 5 years.

It might very well tie into Mikes chart showing the decoupling and could possibly have added to the decoupling effect. To me it just seems to have increased exponentially. Not just the value destruction but also investors running for the hills.

After a while long term in SA becomes scary. How many “Snotklaps” can be expected during the next 10 years? Is it worth the risk or is the world your oyster.

Agreed – but the options for a lot of pensioners, etc – are very limited – to late to start a ”chicken run” – move overseas and spend/live on all your offshore investments – these type of investments had te be done a long time ago, hence my view that its to late to repatriate any funds, if anything at all – with or without, a ”snotklap”!

Thanks Mike S, Gov should enormously implement austerity and rationalisation measures, before the IMF forces it to do exactly that.
This ANC Gov must bite the bullet, practice tough love, let us all swallow the bitter medicine.
Liquidate, sell or close down most SOEs. The whole energy sector has to be deregulated, liberalised and privatised.
It should get rid of 25-30% of civil servants, as there are too many loafers, unproductive employees. And reduce the wages of the lower ranks with 25%, and he higher ranked with 50 or 60%.
Just to start of with.
And so many gov departments can just disappear. What is the use of the NEF, National Empowerment Fund (NEF)? Led by CEO Philisiwe Mthethwa, wife if Min Mthetwa, with a combined salary package of more than R6m, R2m more than President Cyril Ramaphosa.
In Gov too many people are employed to do increasingly less, for ever more bloated salaries. This is not withstanding that in especially health and education there are still many good committed people left.
In this small rural town of about 40,000, the Municipal Manager scores a “paltry” R 110 k a month, but water supply has been ever more erratic over the last few years, and streets are seriously potholed. And the whole muni, which includes 3 other towns, owes Eskom still R 150 m or more.

I don’t only want to blame Zuma. We need the money back and him in orange overalls. Plain and simple. Straightforward. No frills no fuss. Just do it.

Staggering numbers and how theANC is driving us into the wall.

Stop borrowing and start reducing expenses now.

Really outstanding article. Superbly written and well researched. this guys writings are a pleasure to read-well the content is depressing but his style and logic is truly special

“A downgrade will impact bonds negatively….”

I have quite a large proportion of SA bonds in my portfolio.
How will these bonds be affected please.

Interest rates will go up decimating your bond portfolio. Not if but when.

Any suggestions on where to invest if I sell my SA bonds? I need a good yield for living costs.

Thank you.

Shouldn’t one borrow in Rands and invest in Dollars as protection? Looks like the government is going to experience a revenue vs expenditure crunch. It’s unlikely that the SOE and government payroll will be drastically reduced in the short time, nor can service delivery be scaled back or the government will lose power. The government will have to resort to bribes to stay in power, i.e. land redistribution and national health insurance etc.

There seems to be no appetite to pursue non paying residents for services. The government policy is no privatisation. Eskom will need more money – it’s a fact. If borrowing becomes too expensive and raising taxes does not achieve anything, then the only way out is to print more money and institute price controls. The Rand will crash and inflation will rocket, which means your savings in Rands will be destroyed but your debt in Rands will be paid with a 1$ note.

I think that is a good question. Mortgage your house and send the money overseas? Don’t worry about a return – it is just to keep your money safe.

Sounds like the ANC I know. Diverting much needed funds away from key projects to needless higher interest payments and then telling the masses how they are working hard for them and in their best interests. You really have to be a special kind of sucker to keep believing this bunch.

BLAME THE A..N.C. !!!!!!!!!!

bANCrupt (financially, morally and intellectually)

this is like watching a building burning down then the fire department/ANC arrives and starts asking if anyone has any water to spare…. they are so focused on staying in power, that they’d rather scuttle the ship instead of asking for help bailing the water out and making repairs. one bad apple can spoil the lot, in the case of the ANC you have to look REALLY HARD to spot the good apple – if it exists. no wonder Tito wants to legalize pot – he’ll need it when he tries to pass the hat around at Davos and not be surprised if the hat comes back empty…

End of comments.



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