Ramaphosa effect means the strongest economy in years
He's barely three months into his presidency, but the bond market is already telling a good story
It’s not hard to know what investors think of SA. Market prices reveal all. On Friday, the yield on the benchmark R186 bond – the amount investors will accept in returns to hold one of the government’s main bonds – was 8.11%.
The yield has now reached levels last seen before former president Jacob Zuma shocked the world by firing Nhlanhla Nene and replacing him with Des van Rooyen as Finance minister.
The earthquake on that seismic weekend in December 2015 is clear. Yields catapulted from 8.8% to 10.4%. Despite the panicked replacement of Van Rooyen by Pravin Gordhan, international investors did not fully get over the shock. The yield stayed high for the rest of Zuma’s tenure.
But have a look at what’s happened since the ANC elective conference in December when Cyril Ramaphosa was elected party leader and national president-in-waiting. There has been a strong rally in bonds.Since his election, the R186 yield has rallied from 9.2% to 8.1%. And the spread between US 10-year treasuries and the R186 has narrowed by two percentage points.
Yields are not just about what is happening in SA but also reflect the relative attractiveness of the rest of the world. The declining spread over US debt is a better reflection of the rest of the world’s opinions on SA, and they are much more positive. In fact, you have to go back to May 2013 to find a time when the spread was lower.
These numbers are hard to interpret in the abstract but they make a real difference in practice. The budget deficit for this financial year is expected to be R180.5bn and the total borrowing requirement will be R224.2bn.
The interest bill on that amount will be R2.5bn a year lower at current yields than it would have been at December’s yields. These are, of course, multiyear liabilities, and we will borrow similar amounts in future years, so the savings accumulate over time. It will take about five years for the interest savings to be larger than the R35bn the government will spend on university transfers in 2018.In 10 years, we will have saved more than R165bn on interest. That is before considering the borrowing undertaken by the state-owned companies, which will also result in billions of savings. That is money that can now be spent on other priorities, from infrastructure to social development.
This is true even though most ratings agencies consider SA’s debt to be junk. Downgrades took place in November 2017 and you can see how yields worsened in the aftermath. But the positive momentum since December has more than compensated for the effect of those downgrades. Only Moody’s still rates government debt at investment grade and it has been considering a downgrade. It will announce its decision soon. I cannot imagine it will now go ahead with junking SA’s debt, given what the market is indicating.
As the Ramaphosa presidency entrenches strong fiscal management, S&P Global and Fitch may even be convinced into upgrading South African debt back to investment grade.
Some commentators seem to believe financial markets have mystical powers or are driven by animal instincts. Others even think they are part of some global conspiracy to undermine independent governments. But the reality is much more mundane. Debt markets simply reflect investors’ beliefs about the likelihood they will be paid back and the attractiveness of yields compared with what they can get elsewhere.A country that can demonstrate strong fiscal management with a growing economy, meaning it can afford its debt more easily, will find it easier to attract investors, who want to see economies that are thriving, not spluttering.
This isn’t only a story about government debt. The private sector also raises money on bond markets and yields have improved in a similar way.
Our banks, for instance, raise billions to fund their balance sheets and the lower yields mean they can be more competitive in pricing loans to ordinary people and businesses. That makes it cheaper to borrow and invest for growth, triggering a virtuous cycle.
Not even three months into the Ramaphosa presidency, an unambiguous story is being told by the bond market. We are heading for a far stronger economy than we’ve had for years. Call it the Ramaphosa effect.