Government’s R330 billion funding headache

Demand for South African bonds will continue to falter as investor uncertainty builds in the lead-up to the national budget speech and general elections.

This is the view of RMB fixed-income trader Michelle Wohlberg, who pointed to a pause in investor demand at weekly government bond auction bids this year.

Wohlberg said that investor hesitancy is commonplace in the lead-up to potentially major changes in government spending.

One key concern is the upcoming National Budget Speech, which is set to take place on 21 February.

“There is a little bit of uncertainty about how the budget will go, so that’s why we’re seeing hesitancy in the bond market,” said Wohlberg.

Another event on the horizon, South Africa’s general election, makes this uncertainty more severe.

Bond prices have been volatile since the end of 2023. South Africa’s 10-year bond yield peaked at 12.00% in October, ending the year at 10.99% and dropping even further in the first two weeks of 2024.

The government also increased local debt issuance in 2023 despite many investors dumping local bonds in reaction to South Africa’s geopolitical blunders, increased load-shedding and the deteriorating trade balance.

The government’s growing debt burden risks becoming unsustainable, further reducing the attractiveness of local debt.

Investec chief economist Annabel Bishop attributed the volatility in bond yields to foreign investors’ negative sentiment toward South Africa.

“Global and domestic market events have driven the modest volatility, while global concerns of economic weakness persist, and debt is rising,” Bishop explained.

To top it off, the past year has seen rising interest rates eroding bond value.

Poor demand for bonds threatens the government’s ability to spend, which is already vulnerable as government spending continues to outpace revenue.

National Treasury data for December 2023 showed a R16 billion decline in revenue from December 2022, leading to a smaller surplus than expected. Meanwhile, expenditure increased by over R9 billion in the same period.

In the 2023/24 financial year to date, the government has already overspent its income by R292.58 billion, leading it to an estimated full-year budget deficit of just over R330 billion. 

The government will have to issue more debt and add to its already unsustainable debt pile to finance this deficit.

Sanlam’s fixed-income portfolio manager, James Turp, is hopeful that the real return on South African bonds will rise later this year.

Turp said yields will likely remain high as the Reserve Bank delays cutting interest rates until after the elections.

If rates are higher for longer and inflation decreases steadily, local bonds will be more attractive as their real returns will grow.

Furthermore, the Federal Reserve will likely cut interest rates aggressively in the US, encouraging investors to look for real returns in riskier assets, such as South African bonds.

“I am hoping for a good year in bonds. I think the stage is being set globally for a good period for bonds. Let’s hope that plays out,” said Turp.