Sunday Times

If we want for­eign flows we must change gear

- By Hi­lary Joffe Business · Bonds Market · Currencies · Finance · Investing · Financial Markets · Foreign Exchange Market · Reserve Bank of India · Mexico · Russia · Turkey · China · World Bank · Institute of International Finance

Acou­ple of publi­ca­tions have high­lighted the ex­tent to which the taps have been turned off on a source of for­eign cash that SA had in­creas­ingly re­lied on over the past decade — for­eign in­vest­ment in the grow­ing stock of bonds the gov­ern­ment has is­sued on the do­mes­tic mar­ket. SA has more than dou­bled its na­tional debt since the fi­nan­cial cri­sis, mostly to fi­nance ris­ing cur­rent ex­pen­di­ture on pub­lic sec­tor pay, and for­eign bond mar­ket in­vestors sup­plied a big chunk of the fund­ing for this. Whereas many other emerg­ing mar­kets, in­clud­ing many of our African neigh­bours, have gone to in­ter­na­tional mar­kets in re­cent years to raise hard-cur­rency dol­lar or euro debt, SA’s gov­ern­ment has con­tin­ued to do 90% of its bor­row­ing on the lo­cal mar­ket, in rands. But for­eign in­vestors bought much of this rand-de­nom­i­nated, lo­cal cur­rency debt over the past decade, help­ing to fi­nance the gov­ern­ment’s grow­ing debt bur­den and to plug the gap in SA’s bal­ance of pay­ments.

That has meant, as the Re­serve Bank’s lat­est quar­terly bul­letin high­lighted last month, that the non­res­i­dent hold­ing of SA’s do­mes­tic lo­cal cur­rency gov­ern­ment bonds was as high as 42.3% of the gov­ern­ment’s to­tal debt in March 2018. That’s not en­tirely un­usual among large emerg­ing mar­kets even if it is at the top end — in Mex­ico the ra­tio was 32%, in Rus­sia 34% and in Tur­key 20%. But SA stands out in terms of the ex­tent to which gov­ern­ment debt has jumped since 2010, from about 30% of GDP to 50%, with the for­eign hold­ing of the lo­cal cur­rency debt al­most dou­bling over the pe­riod. The Re­serve Bank’s econ­o­mists note that large non­res­i­dent hold­ings of that debt “cre­ate ex­ter­nal vul­ner­a­bil­ity, as ex­oge­nous events … could trig­ger sell­offs”. Those ex­oge­nous events have in­deed come to pass re­cently as in­ter­na­tional in­vestors lost their ap­petite for emerg­ing-mar­ket risk and debt, sell­ing off their bonds in large quan­ti­ties. This is high­lighted in a re­port from the In­sti­tute of In­ter­na­tional Fi­nance (IIF), which ex­pects that port­fo­lio cap­i­tal in­flows to emerg­ing mar­kets, ex­clud­ing China, will de­cline 30% this year, with port­fo­lio debt flows fall­ing by over 60%.

The Bank’s quar­terly bul­letin re­ports a dra­matic de­cline in port­fo­lio in­flows in the sec­ond quar­ter of this year, with for­eign pur­chases of SA’s debt in­stru­ments fall­ing from R47bn to less than R4bn — and the IIF’s num­bers sug­gest the full-year trend won’t be much bet­ter. Nor does the IIF see cap­i­tal flows to emerg­ing mar­kets ris­ing much next year ei­ther, and the im­pli­ca­tions for SA, which is one of the more vul­ner­a­ble emerg­ing mar­kets be­cause of its high fis­cal and bal­ance-of-pay­ments deficits, are pro­found.

SA has tended to rely heav­ily on these more volatile for­eign port­fo­lio in­flows into its bond and eq­uity mar­kets in re­cent years be­cause it hasn’t been too good at at­tract­ing more sta­ble, longer-term for­eign di­rect in­vest­ment. The gov­ern­ment has been good at sell­ing the South African story of well-de­vel­oped, well-reg­u­lated fi­nan­cial mar­kets; it’s been pa­thetic at pro­vid­ing the po­lit­i­cal and eco­nomic en­vi­ron­ment that would have made it at­trac­tive for for­eign­ers to sink large amounts of long-term cap­i­tal into green­fields projects that would have boosted ca­pac­ity and eco­nomic growth and gen­er­ated jobs.

Now the world has changed and with­out that stream of bond mar­ket in­flows, the rand will re­main un­der pres­sure. So too will the cost of gov­ern­ment debt, which is al­ready con­sum­ing more and more of the tax rev­enue the gov­ern­ment raises. If SA wants to be less ex­posed to fickle for­eign debt mar­ket in­vestors in an un­friendly global en­vi­ron­ment, it needs to do more to de­liver the en­vi­ron­ment that will at­tract more faith­ful real-money in­vestors — those who will com­mit for the longer term. And as the World Bank sug­gested in its Africa’s Pulse re­port this week, the am­bi­tion must be to at­tract the kind of for­eign cap­i­tal that will boost the econ­omy’s ca­pac­ity to grow.

SA needs to de­liver the en­vi­ron­ment that will at­tract more faith­ful real-money in­vestors

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