Bond yields climb ahead of Supplementary Budget
South African government bond yields are climbing ahead of this week’s Adjusted Budget as investors contemplate what could be the widest fiscal deficit since World War I.
The country was borrowing at a rate of more than R1 billion a day, but even that might not be enough to plug a hole in the government’s finances of as much as 15 percent of gross domestic product (GDP), according to Investec.
Debt levels will exceed 100 percent of GDP in 2025 and rise to almost 114 percent before the end of the decade, according to government projections.
Finance Minister Tito Mboweni warned of deep spending cuts when he presents the Adjusted Budget tomorrow, but investors were also concerned about an increase in borrowing. Although weekly debt sale, now totalling R7.5bn in nominal and inflation-linked securities remained oversubscribed, the local market did not have infinite capacity to absorb fresh issuance, according to Anchor Capital.
“In the short term, the government will have no choice but to live on debt,” said Nolan Wapenaar, chief investment officer at Anchor, which oversees about R60bn.
Yields on benchmark 10-year rand notes have climbed 68 basis points from a one-year low on June 3 to 9 percent, the highest among major emerging markets monitored by Bloomberg.
That makes South African bonds the worst performers in the period, with a negative return of 7 percent. The Adjustment Budget Mboweni is preparing will redirect R130bn of spending to the R500bn coronavirus stimulus package announced in April. The fiscal deficit is likely to exceed 10 percent of GDP in the fiscal year through March 2021, according to the SA Reserve Bank.
Treasury plans to make “very serious and unusual changes” to its expenditure plans, Mboweni said on Thursday. “Bond yields will be the yardstick against which we can measure both his performance and South Africa’s prospects as a country,” said Wapenaar.