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A fiscal abyss first needs to be defined as it paints a rather dramatic picture – an abyss does indeed present a life-threatening risk! A fiscal abyss means a country’s debt burden has become unbearable and that it is on the verge of defaulting, in other words it will not be able to pay either the interest on the debt or the capital in respect of bonds that have reached maturity (or both).

Financial markets are clearly not concerned about this at present.

Firstly, the main task of credit rating agencies is to continuously monitor borrowers’ ability to meet their obligations and to warn investors in good time if they foresee the possibility of defaulting. Although rating agencies were previously accused of reacting too late, the criticism they faced after the global financial crisis has resulted in their being more proactive.

South Africa currently has an investment rating from all three major credit rating agencies, with a stable outlook (in other words they do not expect to have to adjust their ratings soon). South Africa would certainly not have this rating if it found itself on the edge of a fiscal abyss.

Secondly, the holders of South African government bonds are the ones who would be affected directly should South Africa fall into a fiscal abyss – they are the ones who would suffer the financial losses. And today foreign investors not only hold South African government bonds denominated in foreign currencies like the dollar, but also close to 40% of rand-denominated bonds.

Yield on 10-year SA government bonds

 
 

 

Should investors be concerned about South Africa teetering on the edge of a fiscal abyss, they would naturally try to dispose of their South African bonds as quickly as possible and bond yields would skyrocket. However, as the accompanying graph shows, there is no indication of a change in trend of government bond yields – in fact, the yield on generic 10-year South African bonds have been trading around 8% since 2005.

Similarly, the difference between the yield on a 10-year SA government bond and that on a comparable American government bond (a good indication of investors’ risk perceptions) is currently 526 basis points compared to an average of 542 basis points since 2009, which again does not suggest perceptions of increased risk.

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