VENTURES AFRICA – Citigroup’s inclusion of South African debt in its World Government Bond Index (WGBI) may have been ill-timed, as economic instability deters investors contributing to currency instability.
According to the country’s Reserve Bank Deputy Governor, Lesetja Kganyago, South African debt being included in the WGBI may contribute to on-going economic instability, with new investors being put off from entering the bond market due to the challenges faced by South Africa following the labour unrest, compounded by the overall fall in commodity prices.
Kganyago further opined that the rand will remain volatile for the foreseeable future, this instability fuelled by national debt entry of the WGBI.
“The currency is going to remain pretty volatile,” Kganyago told Bloomberg.
He explained that while investors initially bought up South African debt following its entry on the WGBI, further investors may be deterred by the experiences of the first round of investors, saying: “the problem is that they [the first investors] didn’t seem to be very familiar with the story of an environment of investing in a bond market where the currency plays such a big factor.”
“Unless these investors are really familiar with the story and understand the interplay between the currency and the bond market in the South African context, we are going to have that kind of volatility with us for some time,” Kganyago added.
The rand so far this year has weakened against the dollar by 8.9 percent – a possible effect of the WGBI inclusion, according to Kganyago. This is turn is putting increasing pressure on inflation targets – with fears that the Central Bank may not be able to adhere to its 3 to 6 percent inflation target, as inflation soared to 5.6 last month.
South African government bonds joined the ranks of the WGBI on October 1st of this year, seeing twelve bonds to a total market value of $93.82 billion entered on the index, accounting for 0.45 percent of the index’s value.
It had been hoped that the inclusion would serve to attract investors to the struggling economy, as such the comments by the Reserve Bank’s Deputy Governor may cause some concern.
Gabriella Mulligan is a journalist with a special interest in business and legal issues, having come to journalism following a successful career in consultancy. After completing her legal education at the esteemed law school at Cambridge University, and prior to that at the University of Kent, Gabriella went on to work for a “Big Four” financial and business services firm. She now enjoys writing on topical issues that affect businesses and the economy today. Gabriella is British and Hungarian. She has travelled widely, but harbours a passion for Africa and has made Nairobi, Kenya her home.