Since the global financial crisis, government debt sustainability has become a major concern worldwide. 

^{by Luchelle Soobyah}

South Africa serves as a notable example, as rising government debt since 2009 has increased the perceived risk associated with its government bonds.

This fiscal risk premium has led to higher borrowing costs for the country, caused a steeper sovereign yield curve and elevated long-term interest rates – even when short-term rates remain low.

This paper examines the impact of fiscal risks on South Africa’s macroeconomy, focusing on the sovereign yield curve.

Using a large Bayesian vector autoregressive model to investigate the dynamic relationship between fiscal risk and the yield curve, the paper finds that a percentage point increase in the debt ratio increases the term premium and bond yields by roughly 12 basis points. Both the level and curvature of the yield curve increase, with the slope becoming steeper.