South Africa’s Political Risk Is Greater Than the Bond Market

South Africa’s Political Risk Is Greater Than the Bond Market Thinks

Bheki Mahlobo

– October 26, 2026

10 min read

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The yield differential between South Africa’s 10-year government bond and the equivalent United States (US) Treasury bond has narrowed to levels last seen between 2004 and 2007. The narrowing reflects a marked improvement in the market’s assessment of South African assets, particularly since the formation of the Government of National Unity (GNU) following the May 2024 election. There are, however, compelling reasons to question whether that improved assessment is justified by the underlying political and economic circumstances of the country.

The differential is a useful broad indicator of the additional yield investors receive for holding South African rather than American government debt. The US Treasury market remains the global benchmark for relatively risk-free dollar borrowing, while South African bonds must compensate investors for a range of additional risks. Because the two bonds are denominated in different currencies, the differential also reflects relative inflation, interest rate, and exchange rate expectations. Nevertheless, its compression is an important signal of greater investor confidence in South Africa.

The charts below sets out the differential since 1994 together with some of the risk events that caused it to spike.

The historical comparison is instructive. See how the differential broadly fell between 1994 and around 2007 (apart from the occasional risk events). Between 2004 and 2007, in particular, the South African economy was growing at approximately 5% annually. Government debt had been halved from the levels inherited in the 1990s, and the government had moved into a budget surplus. The African National Congress (ANC) appeared, at least superficially, to exercise almost complete political control, while the government’s fiscal and economic policy direction was comparatively predictable.

Look how after 2008 the differential rose to hold levels a few points above that of the 2004 and 2007 period. Spikes followed on risk events culminating in the Covid-19 spike. As that washed out of the global and local economy the differential fell back to roughly the post-2008 average. But then, after that, and as the GNU was formed, it broke well below that average to hold levels last seen between 2004 and 2007.

On the chart below we set out the differential alongside the US 10-year yield. See how, when South Africa was well governed between 1994 and 2007, the two indicators tracked each other but how the lines went their separate ways as South Africa had to be repriced for additional risk. Now the two lines have again met.

A question The Common Sense has been working hard to answer is whether, from a domestic perspective, the economic and political outlook supports that pricing.

South Africa’s circumstances today are very different from 2007. Economic growth is barely above 1%, government debt stands near 80% of GDP, the budget remains in deficit, and the political environment has become deeply fragmented. The ANC is losing electoral support, its principal coalition partner is increasingly conscious of the political costs of remaining in government, and two radical opposition parties have secured sufficient support to threaten the existing national settlement.

The chart below is a useful visual setting out of the growth rate and government debt levels since 1994.

The market’s apparent response to the country’s current circumstances rests on three broad assumptions. The first is that further ANC electoral weakness will be positive for South Africa. The second is that the GNU has become a sufficiently durable political arrangement to withstand the pressure that will follow the November local government elections. The third is that the National Treasury has restored the country to a sustainable fiscal path.

Recent analysis by The Common Sense suggests that all three assumptions deserve considerably more scrutiny than they have thus far received.

The Political Settlement is About to Face its Greatest Test

The most immediate risk is the local government election scheduled for 4 November. Research published by The Common Sense suggests that between 100 and 130 municipalities could emerge without a governing majority, compared with roughly 70 after the previous election. This would be an unprecedented degree of political fragmentation at municipal level and would require an equally unprecedented series of coalition negotiations.

The significance extends well beyond municipal government. In scores of councils, the ANC and the Democratic Alliance (DA) may collectively command a majority, but there is no comprehensive agreement between the parties about how those governments should be formed. In the absence of such an agreement, the election could produce chaotic bargaining, failed coalition negotiations, competing political alliances, and unstable municipal administrations.

The outcome will also establish precedents for national politics. Where the ANC and DA cooperate, they will reinforce the logic of the GNU. Where either chooses to govern with other partners, they will demonstrate that the GNU is merely one of several possible governing arrangements.

This is a fundamentally different political environment from that which existed in the runup to the May 2024 election, when informed analysts knew what the election result would be and knew that it would lead to a DA/ANC unity government.

Neither Party is Unequivocally Committed to the GNU

The DA has reasons to question the political benefits of remaining in the GNU indefinitely. It must demonstrate to voters that participation in national government is producing meaningful policy change, while avoiding responsibility for the ANC’s continuing failures. Should those reforms prove elusive, the DA will face growing pressure to reconsider the terms on which it participates in government. And in the view of this newspaper its current leadership is at best ambivalent about the ANC arrangement, quite at odds with the deep support for that arrangement in the DA’s previous leadership.

The ANC faces an equivalent, although politically different, problem. Its declining electoral support is making it progressively more dependent on the DA, even as powerful constituencies within the party remain hostile to the policy concessions that cooperation would require. The ANC's electoral strategy also depends on persuading its traditional supporters that it has not surrendered control of government to its principal historical opponent. This newspaper’s sense is that corners of the ANC previously supportive of the DA deal would now support a minority government option.

The result is an uneasy arrangement in which both governing parties are identifying increasingly compelling reasons to distance themselves from one another.

That tension may be manageable while there is no immediate electoral test. The November elections will change the calculation. Parties will be required to choose coalition partners in municipalities across the country, often under circumstances where local and provincial interests conflict with the priorities of their national leaderships.

The assumption that the GNU will remain intact simply because its continued existence is economically desirable is therefore a considerable political leap.

Ramaphosa is Approaching the End of His Political Authority

A further problem is the weakening political position of President Cyril Ramaphosa. His authority has been gravely damaged by the continuing Phala Phala controversy, the ANC's declining electoral support, and the failure of the economy to produce the recovery that was expected after the formation of the GNU.

To see the extent of that, just look at the chart below, which shows how South Africans feel about the consequences of his departure from both the presidency and the leadership of the ANC.

The greatest share of voters believe that if Ramaphosa is removed it will make no difference to their lives, or that their lives will improve. This newspaper also suspects that there are schemes under consideration to have him removed.

Nor is there any firm sense of who may replace Ramaphosa. Senior ANC people have even asked this newspaper who it thinks that person may be!

The closest it has got to a positive answer is in data that have polled Patrice Motsepe since the fourth quarter of last year and show him to be a vastly more popular candidate than any of his peers. This is set out on the chart below.

This newspaper also has reason to maintain that Motsepe is a candidate, although no decision has been taken on whether he will stage a run. In its scenarios for South Africa’s next decade, however, it builds its entire upside case for the country on the idea that such a campaign is launched and is successful.

The Radical Parties Have Acquired Substantial Political Leverage

The view from distant but vastly influential centres, call it the London view, is that further ANC weakness translates into DA strength and that this is a net positive for South Africa.

The electoral evidence suggests a more complicated outcome. The DA has made advances in parts of the country, but the extent of these must not be overstated.

See for example the chart below that shows the DA’s political standing in Johannesburg since 2016.

It is currently polling in the region of just sub-40%, but this is pretty much on par with where it was a decade ago.

At the same time the uMkhonto weSizwe Party (MKP), has also established itself as a formidable political force. In KwaZulu-Natal and, to a lesser degree, in parts of Gauteng and in southern Mpumalanga, it has displaced the ANC across significant parts of the electorate and acquired growing influence over the formation of governing coalitions.

The Economic Freedom Fighters, meanwhile, has demonstrated in Gauteng that it can exercise political influence well beyond its electoral weight. Through its cooperation with the ANC and MKP in municipal governments, it has helped establish an alternative governing model that could become attractive to ANC factions hostile to the national GNU.

Fiscal Prudence is More Apparent than Real

The fiscal assumptions underlying the market’s optimism are similarly open to debate.

Last week’s Medium-Term Budget Policy Statement was initially received as evidence that the National Treasury had maintained control of the public finances. Finance Minister Enoch Godongwana announced that government debt had peaked at 78.4% of GDP, below the 78.9% previously forecast, and that the budget deficit for the current financial year would narrow to 3.9% of GDP against the 4.0% projected in February.

At face value that is very good and exactly what the bond market wated to see. But a deeper analysis by this newspaper found that those headline numbers had been “engineered” at a cost to the very fiscal prudence they were meant to highlight.

Government expenditure was revised upwards from 32.6% to 33.4% of GDP, while revenue was increased from 28.6% to 29.5%. It is this even larger increase in projected revenue that allows the Treasury to present a marginally smaller deficit despite planning for higher expenditure. Those are crazy numbers that on the revenue side sit way past the point of diminishing returns for the country’s economy.

Look for example at the chart below, which shows the budget deficit as a proportion of the growth rate since 1994.

As The Common Sense quipped last week, “If you run your household finances like this your bank manager will certainly not agree that everything is well managed and under control.”

The Market May be Underpricing the Risks

None of this means that the yield differential between South African and US government bonds must immediately widen. Global capital flows, relative inflation expectations, monetary policy, and movements in US Treasury yields can all influence the spread independently of South African political developments.

But the domestic case for assigning South Africa a risk assessment comparable to that of the mid-2000s is difficult to sustain.

The South Africa of 2007 was growing at around 5%, had reduced government debt towards 30% of GDP, was running a budget surplus, and possessed a political system in which the governing party’s authority was largely uncontested.

The South Africa of 2026 is growing at approximately a quarter of that rate, has government debt approaching 80% of GDP, remains heavily dependent on borrowing, and faces a political transition whose outcome is far from certain.

So, what will happen?

Much of the answer may be found in returning to a recent scenario report published by The Common Sense that set out three trajectories the country may now follow into the mid-2030s.

A chart setting these out together with their core assumptions and probabilities follows below.

On the upside, current pricing will prove more than justified. On the benchmark base case we expect that a moderate repricing for additional risk will follow over the next 12 to 18 months. The downside case, should that play out to any extent, will trigger a sharp spike widening the differential by several points.

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