South Africa’s Bond Market Prepares for an Upgrade
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JIMMY MOYAHA: As global volatility rises, markets are frequently seeking reliable indicators to assess which economies are exceeding expectations.
Today, we’ll delve deeper into South Africa’s crucial indicators within our bond market with Mokgatla Madisha, the head of SA fixed income at Ninety One. He’s on the line with me now to discuss these developments.
Ntate Madisha, it’s great to have you on the show. Thank you for joining us.
Let’s begin with the latest statements from National Treasury. Most recently, Director-General [DG] Duncan Pieterse mentioned that South Africa’s bond market effectively signaled an upgrade even before ratings agencies like Fitch and Moody’s made their announcements.
What do you think prompted those comments from the DG?
MOKGATLA MADISHA: The South African bond market has shown remarkable performance over the past two years and continued to outperform at the beginning of this year.
There are various factors to consider. Certainly, when the DG spoke last week, he was referring to the credit spread of South Africa’s dollar-denominated bonds compared to US bonds.
Moreover, there have been several other signs that indicate the bond market is effectively granting SA a ratings upgrade.
For example, the steepness of the yield curve stands out.
This refers to the difference between longer-dated and shorter-dated bonds, which has shifted from high levels at the beginning of last year; the spread between 30-year and 5-year bonds has decreased from about 285 basis points to approximately 100 basis points now.
These indicators illustrate that investor confidence in South Africa’s fiscal outlook has significantly improved.
JIMMY MOYAHA: Mokgatla, in relation to that fiscal outlook, National Treasury recently confirmed the official schedule for the Medium-Term Budget Policy Statement [MTBPS], along with an expected update on our fiscal strategy.
Looking ahead to that event slated for October, what factors have contributed to our fiscal improvement thus far?
We know commodities have performed well, and structurally, South Africa appears to be improving. The rand has also shown resilience against major currencies.
What’s driving the notable fiscal improvements we’ve observed?
MOKGATLA MADISHA: Even before the MTBPS on 21 October, as you’ve noted, we are anticipating the second quarter GDP numbers, which may also include a rebasing announcement.
To date, personal income tax [PIT] has exceeded budgeted figures significantly.
Furthermore, as you mentioned, company tax has benefited from robust commodity prices. It’s also worth noting that VAT [value-added tax] is outpacing expectations.
Several questions arise: Where does this performance originate?
JIMMY MOYAHA: Mokgatla, regarding the questions that need addressing, I consider the ratings agencies like Moody’s, S&P [Standard & Poor’s], and Fitch, who appear to deliver reports with some lag.
This situation could potentially work in our favor, as their rating decisions often come after improvements, rather than anticipating future developments.
All the ratings agencies have indicated a shared sentiment of stability regarding South Africa, yet they haven’t upgraded our outlook nor returned us to investment grade.
What will it take from a fiscal standpoint to possibly influence their decisions in a more favorable direction?
MOKGATLA MADISHA: I would say S&P was the first to act back in November last year, upgrading South Africa’s rating from double-B-minus [BB-] to double-B [BB], along with a positive outlook. Moody’s and Fitch later followed.
In this context, they weren’t lagging at all.
However, considering the current market climate, investors are pricing South Africa as if it’s already at a double-B-plus [BB+] level.
Moving forward, we need to maintain robust growth. National Treasury has demonstrated commitment to fiscal sustainability by forecasting primary surpluses, and there’s a history supporting that. That’s a positive sign.
Nevertheless, we require even stronger growth and significantly lower debt levels.
When examining triple-B [BBB] countries, their debt-to-GDP ratios are generally closer to 55%, while South Africa currently stands at about 78%. We still have a considerable distance to cover to align with median investment-grade countries.
However, it doesn’t mean we need to reach that level to achieve a rating upgrade into investment grade, but we must be significantly nearer to that threshold, coupled with a much stronger growth trajectory than we have now.
JIMMY MOYAHA: Mokgatla, before we conclude, I want to address the recent decisions made by the Monetary Policy Committee [MPC] of the South African Reserve Bank. Interest rates play a vital role in the bond market and fixed-income landscape, so I’d like to discuss the latest interest rate actions.
In May, we saw the first rate hike in a while, followed by an unexpected hold in July when another hike was anticipated.
What implications do these decisions have for the bond market, and how does the bond market typically evaluate or anticipate these decisions’ effects on investment flows?
MOKGATLA MADISHA: Regarding the July decision, it indeed caught many by surprise.
However, we must acknowledge the highly uncertain backdrop. While opinions shift daily, the South African Reserve Bank maintains its stance.
Since the May decision, they observed the signing of a memorandum of understanding between the US and Iran, leading to a notable drop in oil prices and an improved inflation outlook.
Yet just before the July MPC meeting, tensions seemed to escalate once more.
Therefore, the environment remains volatile, limiting the immediate impact monetary policy can have on inflation.
However, when considering a longer-term perspective of 12 to 18 months, it’s clear that even at the current repo rate level, real interest rates aren’t significantly negative and align with a gradual reduction in inflation in the medium term.
So, while there may be initial disappointment, the situation is extraordinarily uncertain. Currently, oil prices fluctuated from $90 down to $80 and back again. In the medium term, I believe the market is likely to show some understanding.
JIMMY MOYAHA: In uncertain times, bond markets can offer valuable insights into where investor sentiment lies regarding a specific economy. South Africa certainly reflects this dynamic.
For now, we’ll conclude our discussion here. Mokgatla Madisha, head of SA fixed income at Ninety One, has joined us to explore recent market decisions and their potential impacts on the bond market.
Brought to you by Ninety One.
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