And if anything, COVID-19 has taught us to take low probability, high impact shocks seriously. Lastly, and linked to the above, is the impact of fiscal policy on the country’s risk premium.
For a small open economy such as South Africa, with a strong dependence on external funding, the deterioration in fiscal metrics, such as a strong rise in the debt-to-GDP ratio, raises sustainability concerns and, in turn, the premium which investors require on government bonds. This is currently the case, as we are seeing elevated long-term government bond yields even after short-term rates were reduced.