Ethel Hazelhurst
South Africa’s total external debt rose “significantly” from R927 billion at the end of March to just over R1 trillion at the end of June, according to the Reserve Bank Quarterly Bulletin released yesterday. In dollar terms the number rose from $120.7bn (R1.05 trillion) to $121.6bn.
The increase pushed external debt (which includes foreign holdings of local bonds) from 30.2 percent of gross domestic product in the second quarter to 30.7 percent in the third; while the percentage of debt to export earnings rose from 98.2 percent to 101.5 percent.
The government’s share of external debt rose from 23 percent at the end of March to 39 percent at the end of June, largely due to “investors’ sustained appetite for government bonds”, the bulletin said.
Despite the problems in the mining sector in the third quarter, South Africa continued to attract foreign direct investment. Following a R6.6bn increase in the second quarter, inward direct investment increased further by R22.2bn as foreign investors “increased their equity stakes in existing direct investment entities”.
Included in direct investment are loans from foreign parent companies to their South African subsidiaries.
Portfolio investment continued to rise in the period from R22.7bn in the second quarter to R27.5bn.
High yields on domestic bonds continued to attract offshore inflows.
The bulletin noted: “The interest rate differential between advanced and emerging economies widened further, directing prospective investors’ funds to emerging market assets.”
At the same time South Africa’s sovereign risk premium narrowed. The gap between the yields demanded of the country’s dollar-denominated 10-year bonds and similar US treasury bonds narrowed from an average 210 basis points in May to 141 basis points in October.
But the bulletin warned: “The recent downgrade of South Africa’s sovereign rating is likely to affect investors’ sentiments towards the country adversely.” However, it said sovereign bonds remained two notches above speculative grade, according to Moody’s Investors Service and Fitch.
Moody’s groups South Africa with Mexico and Thailand, while Standard & Poor’s ranks it with Russia, Brazil and Peru.
The category “other investment” fell from R19.9bn to R7.1bn. This consists mainly of loans from abroad to unrelated private sector companies.
Outward direct investment also accelerated in the third quarter – to R9.6bn from R4.1bn in the second.
The bulletin said the capital flows were mainly due to local direct investors increasing their equity stakes in companies incorporated abroad.