South Africa Overtakes Nigeria in Cost of Borrowing

By Dike Onwuamaeze with agency report

South Africans now pay more than Nigerians to borrow in local currency, Bloomberg said in a report.

It reported that this is a sign of South Africa’s fiscal woes because for the first time ever, the country is paying more to borrow in its local currency than Nigeria, rated four steps lower at Moody’s Investors Service.

Yields on South African rand bonds have climbed more than a percentage point since the beginning of June after the government boosted issuance to plug a fiscal deficit forecast to swell to more than 15 per cent of Gross Domestic Product (GDP) this year.

Nigerian yields have dropped in tandem with most emerging-market peers, benefiting from a wall of monetary stimulus and a risk-on mood as governments around the globe start easing COVID-19 restrictions, the report added. Average bond yield in the country stood at 8.1 per cent as of last Friday.

The International Monetary Fund (IMF) last month further revised downwards, growth in Sub-Saharan Africa (SSA) for 2020 from -1.6 per cent to -3.2 per cent due to the effect of lockdowns on economies in the region.

It noted that oil producing countries such as Nigeria and Angola in the continent have been badly hit by the pandemic and had revised Nigeria’s growth forecast for 2020 to -5.4 per cent, from -3.4 per cent.

Also, South Africa recently lost its Moody’s Investment Services investment-grade credit rating more than 25 years after it was first awarded as it grapples with a nationwide lockdown to curb the spread of the virus.

Moody’s now assesses the nation’s foreign- and local-currency debt at Ba1, one level below investment grade, due to, “continuing deterioration in fiscal strength and structurally very weak growth,” in the country.

South Africa, Africa’s most-industrialised economy, is stuck in the longest downward cycle since at least 1945 with business confidence that’s at the lowest in more than two decades and almost a third of the labour force unemployed, according to a Reuters report.

“Unreliable electricity supply, persistent weak business confidence and investment as well as long-standing structural labour market rigidities continue to constrain South Africa’s economic growth,” Moody’s had stated.

The African Development Bank (AfDB) in its African Economic Outlook (AEO) 2020 Supplement, which was released this week, projected that real GDP in the continent would contract by 1.7 per cent in 2020, dropping by 5.6 percentage points from January 2020 pre-COVID–19 projection if the virus has a substantial impact over a short period.

“The pandemic and its economic consequences are expected to trigger expansionary fiscal policy responses across all categories of economies in Africa. The implied expansionary fiscal stance would further widen fiscal deficits in the continent.

“This worsening fiscal position would be the result of above-the-line increases in budgetary outlay on COVID–19 related health spending, unemployment benefits, targeted wage subsidies and direct transfers, and tax cuts and deferrals,” it stated.

The AEO also showed that countries in Africa would witness higher debt-to-GDP ratios, which are projected to increase further by up to 10 percentage points beyond the pre-COVID trajectory in 2020 and 2021.

It also predicted that remittances and foreign direct investment could plunge due to job losses abroad and wane in investors’ confidence.

The AfDB also advised African governments with fiscal space to help businesses and households to stay afloat through targeted temporary tax relief, cash transfers and hardship allowances.