Government tax shortfall extends South African bond decline

Enoch Godongwana

South African bonds extended declines on Tuesday after a top official said tax revenue is falling well short of targets, fueling concerns that the government will have to flood an already near-saturated market with increased bond issuance.

The warning from South African Revenue Service Deputy Commissioner Johnstone Makhubu came after the National Treasury last week raised the alarm about the budget deficit, cautioning government departments that they would have to rein in spending.

Tax revenue rose 2.6% in the year through August, compared with a budget estimate of 6%, as rolling power outages crimped economic output, Makhubu told Business Day newspaper.

Bond yields have climbed since February after the government signalled an increase in borrowing in the coming years to finance a debt-relief plan for Eskom, the ailing state-owned electricity company.

The South African Reserve Bank has warned that the domestic market was close to reaching a limit on how much more debt it can absorb.

“The consistent supply of bonds to the market is overwhelming demand,” said Rashaad Tayob, head of fixed income at Foord Asset Management.

“In recent years, allocations to bonds have increased materially across income and multi-asset funds, pension funds and banks. Capacity to increase is now limited.”

Yields on 2044 bonds rose four basis points on Tuesday to 12.73%, the highest on a closing basis since July 2. The spread over the 2026 yield widened this week to 370 basis points, the most in more than two years.

The medium-term budget statement on 1 November may reveal ongoing weak government finances, high debt projections, and elevated deficits as a percentage of gross domestic product, compounded by the country’s sluggish economic growth.

The deficit estimate is likely to be revised “closer to 5% of GDP”, compared with the February budget estimate of 4%, according to Investec Chief Economist Annabel Bishop.

“Questions are being asked about domestic corporate tax collection and what a believable national budget will be for 2024,” said Nolan Wapenaar, chief investment officer at Anchor Capital.

“At this stage, it is clear that there will be a significant revenue shortfall.”

In a letter sent to government departments last week, the Treasury said the expenditure ceiling set in the 2023 budget would remain, and no additional resources would be made available while existing baseline budgets would be adjusted downward to accommodate its funding shortfall. 

But curbing spending will be a tough task for South Africa’s governing African National Congress, given it’s due to contest elections next year and opinion polls show it in danger of losing its national majority for the first time since it took power in 1994.

A larger-than-budgeted pay rise for government employees and pressure to extend Covid-era social security grants will add to fiscal strains.

South Africa has limited scope to increase debt issuance, according to Wapenaar. “There are already signs of government debt crowding out other borrowers and the economy at large.”


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