JOHANNESBURG — South Africa’s bond market continues to draw strong interest from foreign investors, even as the country faces mounting global and domestic risks that could cloud its economic outlook.

Investor confidence has grown in recent months, spurred by hopes that the country will stick to its reform agenda despite the political turbulence following last May’s election.

Treasury data shows non-resident holdings of local-currency government bonds rose to 25% between January and March, marking the highest level since October.

The Institute of International Finance also reported that South Africa attracted $2.8 billion in fixed-income inflows between December and March.

This stands in stark contrast to outflows in Asia and a more mixed picture across emerging markets in Europe and Latin America.

Yet, performance has been uneven.

South Africa’s domestic currency bonds slipped 0.3% since January, underperforming against the JPMorgan GBI-EM benchmark, which posted a 2.9% gain.

However, the country’s hard-currency bonds did better than their Sub-Saharan African peers, falling only 1.5% compared to the region’s average 3.3% loss.

Still, concerns are growing.

Global economic uncertainty, particularly around U.S. trade policies and the specter of a broader slowdown, are beginning to weigh on investor sentiment.

“We view recent developments in the U.S. trade policies as a material risk to the growth and inflation outlook,” said Thierry Larose, portfolio manager at Vontobel Asset Management, a holder of South African domestic bonds.

“We see the weaker U.S. dollar as the only meaningful tailwind for local assets.”

Political dynamics at home aren’t helping.

While investors initially cheered the results of last year’s election, seeing the African National Congress’ forced coalition with opposition parties as a win for reform, the honeymoon may be fading.

Tensions between the ANC and the Democratic Alliance over taxes and foreign policy came to a head in February, rattling market confidence and raising doubts about the coalition’s durability.

The South African rand took a hit amid the turmoil, sliding to near-record lows before recovering to trade flat for the year.

“South Africa has always had greater economic integration with the rest of the world and foreign ownership is pretty meaningful, so that has contributed to a relatively high beta to the global economic cycle,” said Andrew Matheny, managing director of economics research at Goldman Sachs International.

Grant Webster, co-head of emerging markets sovereign and FX at Ninety One, remains bullish on South African bonds, but noted the country’s persistent vulnerabilities.

“Structurally weak growth, high debt, and the increase in domestic political noise in addition to extreme global economic and geopolitical uncertainty” have dulled the outlook, he said.

JPMorgan has maintained a neutral stance on the currency and local bonds, noting that current valuations reflect fair value and the near-term risk of a large sell-off has decreased.

Still, external recession risks remain a top concern.

Meanwhile, Fitch Ratings warned that a collapse of the coalition government could further undermine investor confidence and disrupt policymaking, especially if the ANC ends up relying on smaller, less established parties.

However, potential coalition partners like ActionSA and Build One South Africa are seen as fiscally responsible, which could help steady nerves.

“Downside risks from politics are already captured in its projections,” said Thomas Garreau, Director at Fitch.

Externally, the biggest threat comes from U.S. trade tensions.

President Donald Trump’s latest tariff rhetoric has unsettled emerging markets globally, and South Africa is no exception.

Though the U.S. accounts for just 8% of South African exports, with metals largely exempt from tariffs, markets are wary of broader implications.

“Even under a full AGOA exclusion scenario, the GDP impact would be marginal, around 0.07%,” South Africa’s National Treasury told Reuters, referring to the African Growth and Opportunity Act.

“However, certain sectors such as agriculture, construction, and retail would face disproportionate harm.”

South African authorities are trying to shore up confidence.

Treasury officials noted that revenue collections exceeded expectations for the 2024/25 fiscal year, helping narrow the main budget deficit.

Officials are also actively engaging with ratings agencies and foreign investors to maintain credibility.

Eyes are now on S&P Global Ratings, which is set to review South Africa’s credit status on May 16.

The agency currently holds a positive outlook, hinting at the possibility of an upgrade if reform progress holds, a move that would mark its first such decision in two decades.

“Recent political developments have not fundamentally changed our outlook for South Africa,” said Lucie Villa, Senior Vice President at Moody’s Ratings.

However, she also warned that “there are increasing downside risks due to the direct and indirect impacts of U.S. tariffs and political disagreements within the coalition on fiscal and economic policy.”

For now, investors remain cautiously optimistic, but the runway for mistakes is shrinking fast.