




































159 

 

Finance, Accounting and Business Analysis 
Volume 5 Issue 2, 2023 

http://faba.bg/       
ISSN  2603-5324 

 

The Impact of COVID-19 on the Risk Factors Affecting the South African 

Bond Market 

 

Mmakganya Mashoene1* , Mishelle Doorasamy2  

Department of Finance, University of KwaZulu-Natal, Durban, South Africa1 

Department of Accounting, University of KwaZulu-Natal, Durban, South Africa2 

* Corresponding author 

 

 

Info Articles   Abstract 

 
History Article: 

Submitted 8 June 2023 
Revised  5 December 2023 

Accepted 13 December 2023 
 

 Purpose: The purpose of this study is to analyse the effect of COVID-19 

on the risk factors affecting the South African bond market. As such, the 

global economy resulted in a couple of total shutdowns in 2020 to 

minimise the spread of the COVID-19 virus. This has resulted in 

significant adjustments in monetary and fiscal policies to address the 

impact on the fiscus. South Africa also adopted a couple of adjustments 

which saw a drastic spike in the nominal debt issued to fund the 

increased budget shortfall. This came immediately after South Africa's 

exit from the World Government Bond Index after being rated sub-

investment by all three major rating agencies. 

Design/Methodology/Approach: The study takes inference on 

experiences from leading emerging markets with the same attributes as 

South Africa.  

Findings: It was found that, even though South Africa is still well below 

the risk measures for debt management, the quantum of debt has 

increased significantly, thus putting pressure on the fiscus in absolute 

terms. 

Paper Type: Research paper. 

 

Keywords:  

South African bond 

market, market risk, 

COVID-19. 
 

 

JEL: G12, G32, H63  

   
* Address Correspondence:   

E-mail : 217077847@stu.ukzn.ac.za1 

Doorasamym@ukzn.ac.za2 

 

 

https://orcid.org/0000-0002-4789-7113
https://orcid.org/0000-0001-9320-3461


Mmakganya Mashoene and Mishelle Doorasamy/Finance, Accounting and Business Analysis, Volume 5, Issue 2, 2023 

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INTRODUCTION 

 

During the 2020/21 fiscal year, when the global economy was affected by the COVID-19 pandemic 

(International Monetary Fund (IMF) 2020), the IMF made recommendations to sovereign debt managers 

to curb the effect of the stress effected by the COVID-19 pandemic on the fiscus. The COVID-19 pandemic 

resulted in many states shutting down their economic activities, resulting in poor revenue collections, poor 

funding performance in the secondary market, and drastically increasing government expenditures in 

addressing the pandemic. It was indicated that the effect of the global stress on short-term funding liquidity 

is critical as most governments might be expected to experience increased financing requirements due to 

policies/strategies adopted to respond to the crisis. This was also evident in the case of South Africa, where 

significant adjustments were made to boost the unsustainable fiscal position observed over the past couple 

of years and then worsened by a severe decline in the economic and revenue outlook (National Treasury 

2020). 

A review is done on the leading emerging economies for more progressive reforms to address stressed 

economic environments on managing the government debt and government funding strategies. South Africa 

is part of the world's leading emerging economies group BRICS (Brazil, Russia, India, China and South 

Africa), which was founded in 2009. According to the South African Government (2013), the main aim of 

this group was to 'promote peace, security, development and cooperation; and further contribute 

significantly to the development of humanity and establishing a more equitable and fairer world'. The 

recognition of the country's contribution to shaping the socio-economic regeneration of Africa and its 

involvement in peace, security and reconstruction efforts on the continent led to South Africa's offer to join 

BRICS. Further, a developed financial system, and fiscal and monetary policy frameworks added to South 

Africa's advantage. 

 

Table 1. Credit ratings for emerging markets 

Country 
Credit rating during  

2008 crisis 

Credit rating before  

COVID (2019) 

Credit rating after 

COVID (2022) 

Brazil Standard and Poor: BBB 

negative 

Fitch: BBB- negative 

Moody’s: Ba1 positive 

Standard and Poor: BB- positive 

Fitch: BB- negative 

Moody’s: Ba2 negative 

Standard and Poor: BB- 

stable 

Fitch: BB- stable 

Moody’s: Ba2 stable 

Russia Standard and Poor: BBB 

negative 

Fitch: BBB+ negative 

Moody’s: Baa1 negative 

Standard and Poor: BBB- 

negative 

Fitch: BBB negative 

Moody’s: Baa3 negative 

Standard and Poor: NR 

Fitch: NR 

Moody’s: NR 

India Standard and Poor: BBB- 

negative 

Fitch: BBB- negative 

Moody’s: Baa3 negative 

Standard and Poor: BBB- 

negative 

Fitch: BBB- negative 

Moody’s: Baa2 negative 

Standard and Poor: BBB 

stable 

Fitch: BBB stable 

Moody’s: Baa3 stable 

China Standard and Poor: A+ 

negative 

Fitch: A+ negative 

Moody’s: A1 positive  

Standard and Poor: A+ negative  

Fitch: A+ negative 

Moody’s: A1 negative  

Standard and Poor: A+ 

stable  

Fitch: A+ stable 

Moody’s: A1 stable  

South 

Africa 

Standard and Poor: BBB+ 

negative 

Fitch: BBB+ negative 

Moody’s: A3 negative 

Standard and Poor: BB negative 

Fitch: BB+ negative 

Moody’s: Baa3 negative 

Standard and Poor: BB- 

stable 

Fitch: BB- stable 

Moody’s: Ba2 stable 

Source: World Bank and Trading Economics 

 
It is evident that political instabilities and policy reforms have been significant drivers of deteriorating 

credit ratings in South Africa, Brazil and Russia, refer to Table 1. Brazil started to feel pressure from three 

major rating agencies in 2014 after being downgraded to one notch above the sub-investment grade by 

Standard and Poor. According to Korby (2014), Standard and Poor indicated a combination of 'fiscal 

slippage, the prospect that fiscal execution will remain weak amid subdued growth in the coming years, the 

constrained ability of government to adjust policy ahead of presidential elections, and some weakening in 

the country's external accounts'. It was further indicated by Bisseker (2014) that these reasons, which resulted 

in a rating downgrade for Brazil, do apply equally to South Africa, which was also subjected to political 

instabilities, poor economic growth and increasing debt levels. 

Brazil tasted the first sub-investment/junk credit rating 2015 due to mounting political problems that 

have muddled economic policy (Brandimarte 2015). Fitch and Moody's followed in placing Brazil on sub-



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investment credit rating, citing a further deterioration in debt ratios amid economic contractions, (Watts 

2016). South Africa followed through in 2017, where it was rated sub-investment by Standard and Poor and 

Fitch citing economic contractions and political uproars that resulted in the removal of the finance minister 

in a late-night cabinet reshuffle by then-President Jacob Zuma. Moody's finally followed through in 2020, 

which resulted in the exclusion of South Africa from the WGBI after being downgraded to sub-investment 

grade by all three major rating agencies, which is the minimum requirement to stay in the index. According 

to Hamill (2022) and FTSE Russel (2021), China was the only country in BRICS, which is part of the WGBI, 

thus holding 3.07 per cent of the WGBI on a market value-weighted basis at its total exposure. India 

remained on a watchlist by FTSE Russel for possible country reclassification and inclusion in the WGBI 

and Emerging Markets Government Bond Index (EMGBI). Both India and China have investment credit 

ratings with a stable outlook. Further, South Africa, Brazil and China remained in the EMGBI, which has 

the minimum requirements of a C rating from Standard and Poor and a Ca rating from Moody's.   

Russia enjoyed being above investment grade with all three major rating agencies, even during the 

2008 global crisis and the COVID-19 stress. However, a significant decline was realised in 2022 following 

the financial fallout over Russia's invasion of Ukraine. Russia saw a six-notch downgrade to B3, which is 

six notches below investment grade. It was further indicated that all three major rating agencies had 

withdrawn their rating mandates following European Union's decision to impose sanctions on Russia to 

ramp up economic pressure on the country (Chappell 2022).   

 

Table 2. Deciding factors for emerging markets 

Economic variable Brazil Russia India China South Africa 

Economic growth (2021) 5.00 % 5.60 % 8.70 % 8.40 % 4.90 % 

Income per capita (2021) $15 600 $32 070 $7 130 $19 160 $14 340 

CPI inflation (2022) 9.59 % 13.80 % 6.70 % 2.00 % 6.90 % 

Debt to GDP (2022) 72.90 % 13.40 % 55.10 % 21.40 % 71.00 % 

10-year gov yield (Dec 2022) 12.69 % 10.34 % 7.33 % 2.88 % 10.19 % 

Repo rate (Dec 2022) 13.75 % 7.50 % 6.50 % 2.75 % 7.00 % 

Source: World Bank and Trading Economics 

South Africa and Brazil's economic positions are relatively equivalent, which could be attributed to 

the same political and economic instabilities realised as it was learned in Table 2. The countries are both 

rated on sub-investment credit rating where rating agencies have cited almost the same issues faced by these 

two emerging economies. Subdued economic growth has been evident for the past decade, with an average 

growth rate of 0.98 per cent and 0.36 per cent for South Africa and Brazil, respectively. While South Africa's 

CPI inflation was above the target band of 3 and 6 per cent in 2022, it was observed that over the past decade, 

it remained well within the band with only two exceptions. A downward trend was observed a few years 

before the COVID-19 pandemic (Statistics South Africa 2023). The uptick in 2022 above the upper band 

was mainly driven by heightened geopolitical uncertainty from the Ukraine/Russia war, which resulted in 

persistent increases in food and energy prices in both developed and emerging markets (National Treasury 

2023). The South African 10-year government bond yield remained relatively stable over the past decade, 

just before the COVID-19 pandemic, at an average of 8.5 per cent. A 300 basis point weakening was observed 

in March 2020 immediately after the WGBI exit, coupled with a total shutdown impacted by the COVID-

19 shock. Even though some level of stability normalised back to pre-COVID shock, the global volatility 

impacted by Ukraine/Russian war had fuelled some instabilities and increases in the year 2022 (National 

Treasury 2023). This has resulted in weaker yields above 10 per cent for most of 2022. 

In the case of Brazil, CPI inflation has averaged around 5.79 per cent over the past decade, which is 

within the desired target range. However, there were some jumps in 2015 and 2016 way above the then 

target range of 2.5 and 6.5 per cent which resulted in band tightening in 2017 from ±2 per cent allowance 

on the mid target of 4.5 per cent to ±1.5 per cent (Oxford Analytica 2015). After a spike in prices during 

2015 and 2016, the move was to boost their credibility to regain the market's trust and ensure government 

commitment to lowering inflation. De Bolle (2015) indicated that the main driver for the inflationary spike 

was the electricity and fuel price correction policy implemented when the current government took office in 

2015. The hikes constituted of 50.4 cent spike from residential energy, a 22 per cent spike from cooking gas 

and an 18.6 per cent spike from gasoline, thus leading to a 12-month inflationary spike of 14 per cent in 

administered prices, which account for a 25 per cent of Brazilian CPI inflation. However, a couple of years 

pre-COVID stress, inflation in Brazil was well contained below the midpoint inflation target of between 4.25 

and 4.5 per cent. 

Given that Brazil is a commodity country, international increases in commodity prices and continued 

political instabilities fuelled the inflation spike to 8.3 per cent in 2021 (Carrara 2022). The same volatilities 

were observed on the 10-year government bond yield over the past decade. At the height of political 

instabilities in 2015, the 10-year government yield weakened to above 15 per cent. A downward trend was 



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also observed a couple of years before COVID-19; however, in line with global volatility tracking the 

pressures due to Ukraine/Russia war, weaker rates were observed in 2022.  

Over the past decade, Russia's economic growth has been performing relatively better pre-COVID 

crisis, except for a -2 per cent contraction observed in 2015. According to Dabrowski and Collin (2019), the 

contraction was driven by a combination of a sharp decline in the international price of oil, which is Russia's 

main export item, and the conflict with Ukraine, which resulted in United States and European Union 

sanctions against Russia, and Russian countersanctions. This has also negatively affected the inflation rate, 

which increased to 15.53 per cent due to the same geopolitical issues. A recovery trajectory was observed 

pre/post-COVID stress, hammered by Russia's recent unprovoked and unjustified Ukraine invasion in 

February 2022 (Welt 2022). This has resulted in the European Council adopting a couple of sanctions against 

Russia and Belarus, which aimed to weaken Russia's ability to finance the war and to specifically target the 

political, military and economic elite responsible for the invasion. As such, inflation increased by over 100 

per cent to 13.8 per cent in 2022 compared to the prior year. A 10-year government bond yield also weakened 

by around 200 basis points over the same period. While the economy still showed positive growth in 2022, 

the World Bank, the IMF, and the Organisation for Economic Cooperation and Development (OECD) 

expect the Russian economy to continue to shrink in the short term. 

 

METHODS 
 

Per the overall objective of this study, the study is qualitative and looks at the performance of 

measures of the risk factors affecting the South African bond market. In 2014, the South African government 

adopted some risk measures and benchmark ranges/limits for debt portfolio management (National 

Treasury 2014). These risk measures were adopted to manage the government debt portfolio against inflation 

risk, refinancing risk in the short-term and currency risk. Table 3 indicates that, as of 31st March 2023, most 

risk factors are well within the benchmark range/limit except for the weighted term-to-maturity of inflation-

indexed/linked bonds, which is 1.2 years below the lower limit of 14 years.   

 

Table 3. South African debt risk benchmarks 

 
Source: (National Treasury 2023: pp.82) 

 

The total value of the South African government bonds/debt listed in the Johannesburg Stock 

Exchange (JSE) was over R2 trillion in 2018, accounting for around 90 per cent of the reported liquidity 

(Johannesburg Stock Exchange 2018). As such, the South African government debt is exposed to the 

following market risks: 

 Liquidity risk: As Jonasson and Papapioannou (2018, 7) indicate, liquidity risk refers to 'the risk of 

investors facing a sudden diminishing trading volume of a bond or a series of bonds in the secondary market'. 

A lower trading volume/tradability in a bond might result in a higher cost of borrowing or low demand. A 

government institution issuing a bond should usually assess the market's demand around the prospective 

maturity before issuing the bond. The study looks at the performance of the weekly auction for inflation-

indexed bonds in the primary market over the COVID-19 period. This is due to the illiquid nature of the 

instruments, and the poor auction performance might result in a funding shortfall for the fiscus. Weekly 

auctions are measured by the bid ratio which is defined as the total bid amount (in rand terms) as a ratio of 

the nominal amount offered for instrument 𝑖: 
 

bid ratioi =
total bid amounti

nominal amount on offeri

 (1) 

 



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The average bid for the week 𝑘 is calculated as the weighted average taking into consideration the 

total nominal amount issued into instrument 𝑖 at time 𝑘: 

 

average bidk =
∑ total nominal issuedi,k ∗ bid ratioi,k

n
i=1

∑ total nominal issuedi,k
n
i=1

 (2) 

 

where: 

𝑛 is the total number of instruments issued in a week.  

 

This is further averaged over a month to obtain monthly average bid ratios. The study further looks 

at bond holdings by different institutions to analyse the effect of COVID-19 on investor preferences. Bond 

holding per institution is defined in a relative form as: 

Holdingi,t =
xi,t

∑ xi,t
n
i=1

 (3) 

where: 

𝑡 is time in months, 

𝑖 is the investing institution with a total sample of 𝑛, 

𝑥𝑖,𝑡 is the total amount of inflation-linked bonds held by investing institution 𝑖 at time 𝑡. 

 

 Refinancing risk: Government institutions rarely aim to pay off the capital amount owed when the 

bond matures. This process is mainly due to most governments running substantial budget shortfalls. 

Jonasson and Papapioannou (2018) defined refinancing risk as 'the ability to refinance a debt exposure at 

maturity as a result of a loss of market access or low investor appetite'; this is very crucial, which might lead 

to a costly refinancing process for government institutions who are at the mercy of investors. This study 

assesses the effect of increased borrowing in South Africa during the COVID-19 period, which aimed at 

addressing the impact of the crisis on the fiscus. This methodology follows the same presentation by major 

emerging countries to analyse refinancing risk. National Treasury of Brazil (2020), Institute for International 

Monetary Affairs (2020) and Bloomberg (2020) analyse the debt growth of Brazil, India and China, 

respectively; and the analysis further incorporates the effect of COVID-19 on debt levels and the impact of 

refinancing pressures in the short-term. 

 Inflation risk: Inflation risk plays a critical role in bond pricing given that nominal bond yields are 

a function of, among others, inflation premium and real interest rate (Hördahl 2008). The consumer price 

index (CPI) rate in emerging markets is relatively higher (Ha et al. 2018), thus translating into a higher cost 

of borrowing in emerging economies. The study analyses the historical relationship between the movements 

in South Africa's CPI and the cost of borrowing in real terms over the COVID-19 stress period. Correlation 

analysis is further used to quantify the relationship on historical movements between the CPI and the real 

prime rate. Mukaka (2012) defined the correlation as the strength of the assumed linear association between 

variables in question and it ranges between -1 and 1. A sample correlation coefficient 𝑟 is defined as: 

 

r =
∑ (𝑥𝑖 − 𝑥)𝑛

𝑖=1 (𝑦𝑖 − 𝑦)

√[∑ (𝑥𝑖 − �̅�)2𝑛
𝑖=1 ][∑ (𝑦𝑖 − �̅�)2𝑛

𝑖=1 ]
 (4) 

 

where: 

𝑥𝑖 and 𝑦𝑖  are values for variables 𝑥 and 𝑦.  

 

Turney (2022) also indicated that Pearson's correlation coefficient could be treated as an inferential 

statistic. This implies that the correlation coefficient can be used to test the statistical hypothesis of whether 

a significant linear relationship between two variables does exist.  

 Sovereign risk: As defined by Jonasson and Papapioannou (2018, 7), Sovereign credit riskiness is 

'associated with the credit risk of a sovereign and the ability of a counterparty to fulfil its debt commitments'. 

Economic factors and the political environment are considered when determining this risk factor. Most 

foreign investors will require a government institution to achieve a particular credit rating standard by one 

or two big global rating agencies. The study analyses South Africa's historic credit rating by the three major 

rating agencies (i.e. Standard and Poor, Moody's and Fitch). Further, it incorporates the effects on the 

government bond market. 
  



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164 

 

DISCUSSION 

 

Liquidity risk 

0%

10%

20%

30%

40%

50%

60%
Inflation-linked bonds holdings

Jun-22

Mar-20

Dec-19

Figure 1. Historical inflation-indexed bond holding in South Africa   

 

It can be observed in Figure 1 that during the period of COVID-19 high stress in March 2020, 

monetary institutions came through for government inflation-indexed bonds. They did increase their overall 

holdings in this instrument by five percentage points to 18 per cent; however, overall holdings for other 

institutions remained relatively the same compared to normal market conditions in December 2019. This 

implies that increased issuances into this bond instrument to cover the effect of the COVID-19 pandemic on 

the social economy are mainly carried by monetary institutions in line with the South African Reserve Bank 

mandate to boost funding liquidity by buying government stock during this period.  

A significant decrease of five percentage points in the overall holding was observed in June 2022 on 

both monetary institutions and official pension funds, while an increase of 3 percentage points and four 

percentage points was observed in foreign investors and private self-administered funds holdings. This could 

be attributable to a cut in SARB's mandate to buy government stock and a redemption of the R212 (4.71 %, 

2022) bond in January 2022. Holdings into the R212 bond were mainly dominated by monetary institutions 

and official pensions funds, which held 26 and 53 per cent of the nominal amount outstanding, respectively. 

However, given the illiquid nature of inflation-indexed bonds, official pension funds remain the instrument's 

biggest buyer, with the mandate to hedge their long-term liabilities against future inflation risk (National 

Treasury 2021). 

 

0,00

1,00

2,00

3,00

4,00

5,00

6,00

0

2 000

4 000

6 000

8 000

10 000

12 000

R
 m

illi
on

Months

Total issuance Average bid (times) Average yield (%)

Figure 2. Primary market bond auction performance  

 

It is evident from Figure 2 that pre-COVID-19 pandemic, government-issued inflation-indexed bonds 



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165 

 

in the South African market had a slightly higher demand compared to during and post-COVID-19 crisis. 

Pre COVID-19, the average bid ratio was, on average, around 2.88 times the paper offered in the market. 

There is a practical level of stability in the average clearing yields over the 2019/20 financial year. A 

considerable dive was observed from May 2020, when issuances increased drastically to over twice pre-

COVID levels. This happened at the same time when a significant decline in the demand for this bond 

instrument was observed. During the COVID-19 period, South African Reserve Bank's mandate to buy 

government stock helped to mop up most of the increase in government bond issuances which peaked at 

around R10 billion a month compared to the prior average of R3.6 billion a month in inflation-indexed 

bonds. The same liquidity continued in the 2021/22 financial year, where monthly bid-to-cover ratios 

averaged below two times the amount on offer; however, monthly average bond issuances into inflation-

indexed bonds had declined to around R4.2 billion. In light of heightened global volatility and continued 

domestic political and economic instabilities in the 2022/23 financial year, average clearing yields weakened 

steadily by over 170 basis points between March 2022 and February 2023.  

 

Sovereign risk 
Since the South African government gained independence in 1994, it is evident in Figure 3 that, over 

time, South African local debt has been regarded as of value by the top three global credit rating agencies. 

The local debt credit rating improved over time and peaked at BBB+ for S&P and Fitch and A3 for Moody's. 

It is also observed that during the 2008 global financial crisis, credit ratings remained resilient at the highest 

credit rating rank. This could be attributable to relatively better economic and political conditions during 

that period.  

 



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Mmakganya Mashoene and Mishelle Doorasamy/Finance, Accounting and Business Analysis, Volume 5, Issue 2, 2023 

167 

 

 
Source: South African Reserve Bank (2012: pp.1) 

Figure 4. South African bond inclusion in the WGBI  

 
Due to relatively better market sentiments in 2012 which included an adequately more robust 

domestic long-term credit rating and a market capitalisation exceeding US$50 billion, it has made it possible 

for the South African domestic bonds to be included in the WGBI. As a result, South African bond yields 

strengthened significantly towards mid-2012, coupled with lower-than-expected inflation data and a cut in 

the repurchase rate, and further higher levels of global liquidity as foreign investors turned to emerging 

markets looking for higher returns. This is evidenced by a significant increase in the foreign/non-resident 

investors' holdings of South African government domestic bonds from 12.8 per cent in 2008 to 29.1 per cent 

in 2011 (National Treasury 2012). South Africa was the initial African country to participate in the WGBI, 

accounting for 0.45 per cent of the index's market value, with 12 South African government bonds included 

in the WGBI in October 2012 (South African Reserve Bank 2012). 

However, it is noted in Figure 4 that these benefits were short-lived due to domestic volatility in the 

second half of 2012. The Marikana massacre, which Bruce (2015) indicated that it resulted in the fatalities 

of 34 mineworkers and seventy-eight left seriously injured following the open fire assault by the members of 

the South African Police Service in an attempt to contain a wildcat strike at Lonmin platinum mine in North 

West province. This resulted from a week-long protest in which the miners demanded a wage increase. 

Secondly, sovereign credit rating downgrades initially by Moody's from A3 to Baa1 and later by Standard 

and Poor from BBB+ to BBB with a negative outlook from both credit rating agencies. South African 

Reserve Bank (2012) indicated the main drivers for this change were weakening government's institutional 

strength, reduced fiscal capacity, adverse investment climate because of infrastructure shortfalls, relatively 

high labour costs notwithstanding lower employment rate, and bigger concerns about future stability in the 

political space. Lastly, a more significant budget deficit was estimated to be 4.8 per cent of Gross Domestic 

Product (GDP) for the 2012/13 financial year in the 2012 Medium Term Budget Policy Statement from 4.2 

per cent of GDP for the 2011/12 financial year (National Treasury 2012). However, the cost of borrowing 

in South African bonds remained almost 100 basis points lower than before the announcement of possible 

inclusion in the WGBI. This could imply that these listed domestic issues could have been well expected 

and included in the bond yield estimation. 

However, over the past decade to date, the South African political and economic state has 

deteriorated significantly. The government budget deficit worsened to 5.8 per cent of GDP in 2023 (National 

Treasury 2023), and, it was further indicated by National Treasury (2012) that the budget deficit above 4.5 



Mmakganya Mashoene and Mishelle Doorasamy/Finance, Accounting and Business Analysis, Volume 5, Issue 2, 2023 

168 

 

per cent of GDP is unsustainable. This has resulted in sub-investment sovereign credit ratings for South 

African debt, with "a clear path towards government debt stabilisation" being the main reason given by all 

three major credit rating agencies (Cliffe Dekker Hofmeyr 2020). Global financial volatilities also aggravate 

the poor economic performance in the South African/ emerging markets. According to The World Bank 

(2022), the effect of the war in Ukraine will compound the damage in the global macroeconomic 

environment caused by the COVID-19 pandemic, which might see the situation in developing economies 

being worse than pre-pandemic levels. This could be associated with the recovery from the stagflation of the 

1970s; steep increases in interest rates in major advanced economies were required, thus triggering a string 

of financial crises in emerging markets and developing economies. 

Due to the global crisis and domestic volatilities (i.e. political instability, continued rolling electricity 

load-shedding and heavy reliance of more poor-performing state-owned entities on the state for bailouts), 

the South African economic state continues to tumble. In trying to contain the situation, National Treasury 

(2023) indicated that the state continues to hand over bailouts to these state-owned entities to avoid total 

failures given the direct role they play in the well-functioning of the economy. Among other bailouts, the 

biggest one was to help the ailing state energy generator. National Treasury (2023) indicated that the state is 

proposing a R254 billion debt relief to Eskom over the medium term, which comprises R168 billion capital 

and R86 billion debt service cost. This continues to add to the already high level of debt and debt service 

cost faced by the South African government, thus resulting in a poor credit rating and the credit outlook for 

government debt stock. Based on Figure 4, it could be observed that the South African domestic debt is rated 

BB- by S&P and Fitch; and Ba2 by Moody's, which is further down the investment grade of BBB-/Baa3 and 

also significantly lower than the credit rating of BB ranked by S&P and Fitch in 1995 when the South African 

government stock was first rated.  

The situation then was far worse, given that the South African government experienced political and 

financial crises due to several sanctions imposed by several international bodies (Levy 1999). The sanctions 

involved a ban on any form of trade, investments in the country and lending activities. It was estimated that 

the South African external debt was around $24 billion by the mid-1980s, of which two-thirds was short-

term (i.e. less than five years). After most lenders decided not to renew their short-term loans, South Africa 

ended in a liquidity crisis where the state depended on foreign lenders' willingness to refinance. The intensity 

of the crisis was so deep and it resulted in a significantly weaker Rand, and the state decided to close both 

the stock exchange and foreign exchange markets, with interest payments on the debt being suspended. This 

could be considered very bad compared to the current market conditions where South Africa still has access 

to funding. Arnold and Winning (2020) indicated that South African domestic bonds' attractiveness relative 

to other emerging markets peers and the depth of the South African domestic market has helped minimise 

the effect of the WGBI exit.  

 

Inflation risk 
It could be observed in Figure 5 that over the past decade, the South African CPI inflation rate 

averaged above the 4.5 per cent midpoint; however only 25.48 per cent of the time, the CPI inflation rate 

was above/below the SARB's 6 or 3 per cent inflation target. A lower CPI inflation rate of 2.1 per cent was 

realised in May 2020, which was last seen over 15 years ago in September 2004 when a CPI inflation rate of 

1.3 per cent was realised. A lower CPI inflation rate might negatively affect demand for inflation-indexed 

bond instruments, given that interest rates already do not include the future inflation component; as such, 

the future value of the investment might be eroded by lower inflation accruals, making the bond instrument 

less attractive. Primary market auction bid-to-cover ratios support this; refer to Figure 2, which declined 

drastically over the COVID period and was influenced by a lower CPI inflation rate. 

It could also be observed that the cost of borrowing in real terms has a somewhat antagonistic 

relationship with annual changes in the headline CPI inflation rate. It was observed that over 60 per cent of 

the time, changes in the real prime rate and CPI inflation rate moved in opposite directions for the past 

decade. The CPI inflation rate is seen increasing towards the end of the 2021/22 financial year, and this 

peaked at 7.8 per cent in July 2022, with this rate last seen 13 years ago in May 2009 when the CPI inflation 

rate was 8 per cent. 



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169 

 

0

2

4

6

8

10

P
er

ce
nt

Months

Real prime rate

CPI inflation

Figure 5: Relationship between CPI inflation and real prime rate in South Africa  

 

Refinancing risk 

The government maturity profile for domestic debt in Figure 6 indicates a much-clustered profile in 

the short-to-medium term, with an outstanding amount of at least R100 billion per year. A considerable 

amount is also outstanding on the Treasury bills, which must be rolled over weekly. The issue of rolling over 

the debt implies that even though it is not expected to redeem the amount outstanding on Treasury bills, 

new issuance is made every week to redeem the outstanding portion and also raise funds for cash 

management purposes. The ability to raise cash every week to meet these responsibilities adds to the already 

pressurised government's ability to raise cash every week to fund the increasing budget deficit and also build 

cash reserves for bonds maturing in the short term. 

 

 -

 100 000

 200 000

 300 000

 400 000

 500 000

 600 000

R
 m

ill
io

n

Fiscal year

Treasury bills

 Long term bonds

Figure 6: South African government domestic debt profile 

 

South African government is projecting bond redemptions of above R100 billion in the medium term 

for every fiscal year. This is relatively higher than the average fiscal year bond redemptions of R60 billion 

realised in the preious fiscal years (National Treasury 2021). This brings the issue of bond switches to 

minimise the risk of being unable to meet financial obligations in a particular fiscal year. Bond switches 

phenomena/programme is defined as a transaction of exchanging a series of existing source bonds held by 



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170 

 

investors with a series of selected destination bonds where both source and destination bonds have to be 

determined by bond issuers. According to National Treasury (2000), this phenomenon was introduced in 

the South African market in early 2000 when the South African government faced declining borrowing 

requirements and reduced the number of new bond issues. The switch programme was introduced to manage 

liquidity by repurchasing in advance, less-liquid maturities while financing these bond purchases through 

more significant new issuances into the benchmark bonds.  

The switch programme gives the bond issuer an advantage of rapidly restructuring the maturity profile 

of outstanding debt. The refinancing issue is not entirely addressed when switches are done to minimise the 

government's redemption obligations in the short term; however, it is transferred to longer maturities. Given 

the highly clustered South African government debt maturity profile in Figure 6 and the growing primary 

deficit, the issue of a switch programme will always be needed to minimise the eminent pressure in the short 

term for the government's ability to meet other fiscal policy needs. However, the switch programme might 

not always be feasible as it depends on the willingness of the bondholders to switch maturities, which might 

not always favour their investment plans. This implies that the switch programme will remain costly for the 

government. 

 

CONCLUSION 

 

Different economic and monetary policy regimes characterise the period under review. The effect of 

the COVID-19 pandemic on the country's economic and social aspects necessitated increased borrowing 

requirements and some measures from monetary policy to help the government borrowing plans, which 

were faced with increased liquidity issues. In March 2020, South Africa was downgraded to sub-investment 

grade by Moody's, the third most prominent credit rating agency, to grade South African sovereign bonds 

on junk/sub-investment grade following Standard and Poor and Fitch rating agencies in 2017. Current 

domestic political volatilities and worsening debt levels fuelled by the growing budget deficit and poor 

economic conditions remained the most significant drivers for this decision. This resulted in a dire situation 

where South African bonds were excluded from the WGBI, and foreign investors sell-off of government 

bonds amounting to R3.2 billion a month after the exclusion (Arnold and Winning 2020). However, this 

was a long waited decision and has long been priced in the bond prices and further clouded by the effect of 

the COVID-19 crisis. As a result of the COVID-19 pandemic, the global economy was shut down from 

trading, and emerging markets realised further sell-off from most foreign investors as they looked for safer 

markets. Further, to address the social impact of the continued shutdowns in the country, the South African 

government made fiscal adjustments to minimise the impact on livelihood. This has further aggravated the 

poor position of the South African government's funding/borrowing levels while faced with liquidity issues 

driven by the WGBI exit and the COVID-19 crisis. South African government resorted to tapping on 

available resources for cash management purposes in line with (International Monetary Fund 2020) 

guidelines [i.e. drawing down its cash deposits held with the Reserve Bank, increased short-term funding 

(Treasury bills and bridging finance from the Corporation for Public Deposits) and receiving loans from 

international financial institutions]. The South African Reserve Bank also helped manage liquidity issues by 

buying government stock. This has helped in reducing the cost of borrowing by almost 200 and 350 basis 

points on inflation-indexed bonds and fixed-rate/nominal bonds, respectively, during the peak of COVID-

19 stress around March/April 2020; and further boosted primary market bond auction's bids from 1.7 to 

4.31 and 2.25 to 4.24 for both inflation-indexed bonds and fixed-rate/nominal bonds, respectively. Even 

though the South African debt seems to be well managed from a risk management perspective, it is noted 

that the quantum of debt has increased drastically, and this might be masking the bigger picture. Short-term 

refinancing pressure remains, thus putting the country at the mercy of investors for funding and further 

shifting the eminent refinancing obligations to the long term. 

  
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