One possible explanation for South Africa’s steep sovereign yield curve is that elevated exchange rate depreciation risk has been embedded in our long term interest rates. Options-implied variance, which captures exchange rate uncertainty priced into FX options prices, has historically had a strong, but time-varying relationship with the South African term premium. This suggests that high South African sovereign long term rates could partly reflect investors concerns about the possibility that the rand could depreciate strongly, which would be expected to push up inflation. Interestingly, the relationship has typically shifted to being negative after large exchange rate depreciations. This could reflect expectations that exchange rate overshooting would be partly reversed, especially when a specific bout of depreciation was driven by global risk shocks. Over the last 6 months, the correlation has weakened however, since uncertainty about the outlook for the USDZAR has been remained relatively stable at an elevated level, while the term premium has risen. This suggests the recent increase in the term premium more likely reflects elevated credit risk and liquidity premia. 
Footnote
For more details on the approach used to estimate FX options-implied moments, you can read our paper, where we show that option-implied rand variance can improve forecast accuracy when predicting the USDZAR.
