Foreigners Continue Buying Local Government Debt despite Risks

In spite of the serious risk of credit rating downgrading by Moody followed by Standard & Poor’s downgrade, a big question arises – should domestic fundamentals not try and improve in the imminent months?

Till this of the year, offshore clients have purchase over R13bn worth of local paper. This can be regarded as a dramatic turnaround on R24bn withdrawal made by offshore merchant account  holders during January.

That came when the US Federal Reserve emphasized on stimulus reduction for the first time and over 70,000 platinum mine workers set their tools aside over pay issues – what is going to be remembered as the longest strike in the history of South Africa.

It is believed that the increased bind inflows have maintained the Rand within steady range of R10.55 to R10.85 in opposition to dollar for the past couple of weeks.

Last month, offshore merchant account investors (which constitute about 40 per cent of domestic market) purchased about R8.7bn of local bonds. This was followed by the May purchases of about R7bn.

According to Michael Keenan – Barclays Africa South African strategist, the high risk merchants were exploiting full benefits of extremely low interest rates that were being charged on development markets.

However, the pace at which the foreign inflows are aiding the government in various financial capital expansion projects is expected to be altered soon, in case the South African Reserve Bank announces another hike in interest rate.