Local-Currency sovereign risk on South African government bonds

Working Paper 882

Abstract

While local-currency bond markets have become a dominant source of emerging-market financing and an integral component of the global financial system, market-observed measures of sovereign default risk are still based on foreign-currency denominated debt. This note replicates and assesses the Du-Schreger credit risk spread on local-currency debt for South Africa for the period between January 2008 and December 2021. This credit spread is found to be a good measure of local-currency sovereign risk for South Africa during the period under review as it captures the evolution in key developments relevant to domestic sovereign risk while being less responsive than market-based measures to global developments that are not directly linked to fiscal risk.