In the $100trn global bond market, it appears to be hard to find a good investment. With Germany announcing that it will sell an ultra-long bond at 0% for the first time this week, there is talk of Germany being in danger of Japanification. If investors put their money into Japanese, German and many other European government bonds, they would be putting money into assets knowing they will lose money on the deal. Contrast that to the yield of South Africa’s 10-year bond which is more than 8%. It sounds like a no brainer for a global bond investor, but foreigners are still not biting. Last week they were dumping foreign bonds at a rate of almost R2bn a day on the prospect that Moody’s might downgrade South Africa to junk status. In an interview with Biznews’ Alec Hogg, Rhandzo Mukansi from Futuregrowth takes a peek at what has been going on in the global bond market and says South Africa’s fiscal situation is deterring investors despite the good yields. Mukansi dismisses a possible IMF bailout and says if government spending can be reined in, the ship can be turned around. – Linda van Tilburg
Rhandzo Mukansi said what was happening in global bonds was that the world had essentially been betting on deflation and there was a risk that over time the rates would be even lower than they are today. It would result in negative interest rates across large swathes of Europe and in the US. Deflation meant that prices fell and that was not really good for economies.
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Across Europe for the greater part of the past ten years, monetary policy had been the primary instrument in trying to starve off deflation; a lot of liquidity had been pumped into the Euro area initially in the form of quantitative easing and now in terms of negative rates. It had not been effective in increasing inflation. He said the ECB had a measure of inflation which was around 2% that they expected from a healthy economy and over time the Euro area had fallen short of that.
“Markets were disbelieving the reflation in the Euro area and as a result of that you see negative rates across a large swathe of Europe, not only in developed markets but also in emerging economies like the Czech Republic, Hungary and Poland who are all flirting with negative interest rates at the short end of their nominal bond curve.”
Mukansi said whether that meant South African bonds with a pretty healthy positive interest rate were good bonds was only true when you look at it simplistically; when you only compared rates with the rest of the world. However, when you zone into South Africa’s domestic fundamentals and take the state of the domestic economy and the state of fiscal sustainability into account, the question arose whether the fundamentals warranted foreigners buying our bonds.
He said there had been a lot of talk around the possibility of IMF bailouts which was due to the weak macro-economic backdrop and fiscal sustainability issues. Mukansi said an IMF bailout was being discussed because there was certainly a fiscal issue domestically. However, he did not believe that South Africa had a sustainability issue or a market access problem which was historically one of the conditions under which the IMF had offered financing when requested by a country.
Mukansi said Futuregrowth was hugely concerned about the state of South Africa’s fiscal finances – “We don’t mince our words around that.” But although South Africa’s fiscal finances were in a perilous state, there was still the ability to turn the ship around, there was still a level of self-determination that could be applied to turn things around. The primary balance, South Africa’s budget less debt servicing costs was in negative territory at the moment and over the medium, 3-5 years it would remain in the deficit territory. “It will mean continually borrowing to finance our economic expenses.”
Mukansi said this number would remain negative in the medium term, but if tough decisions were made in the forthcoming budget in October, that number could be reined in. Mukansi said “some effort is being made towards that right now; the national Treasury is speaking of reigning in the budget of state departments, that is in order of 5% for the next year, 6% for the fiscal year after that, growing to 7% in the year thereafter.” He said it should make a significant adjustment to our baseline expectations for the primary balance and ultimately for sustainability.
