South Africa’s Steepest Yield Curve on Record Flags Fiscal Risks

JOHANNESBURG (Capital Markets in Africa) – South Africa’s yield curve has steepened to a record as investors protect themselves against a riskier fiscal outlook.

The government said its finances were deteriorating last week, driving the premium on 20-year yields over two-year securities to more than 365 basis points on Wednesday, the most since Bloomberg started compiling the data in 2003. Longer-dated bonds will remain undervalued, according to Standard Bank Group Ltd.

“While we still expect the yield curve to flatten somewhat, the ongoing fiscal and credit risks per the medium-term budget policy statement will likely keep it steep,” Zaakirah Ismail, a strategist at Johannesburg-based Standard Bank, wrote in a note.

Finance Minister Tito Mboweni lifted his forecasts for the fiscal deficit and gross government debt over the next three years on Oct. 24, raising the government’s borrowing needs. Moody’s Investors Service, the only major rating company that still assesses South Africa’s local-currency debt at investment level, described the budget update as “credit negative.”

A downgrade by Moody’s would result in South Africa’s exit from the Citigroup Inc. World Government Bond Index, sparking forced selling by funds that track the gauge. The company rates South Africa’s local-currency bonds at Baa3, its lowest investment level, with a stable outlook. Fitch Ratings and S&P Global Ratings cut their assessments to junk last year.