The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

The central bank’s bond buying activity eased in October, data released on Friday showed.

The SA Reserve Bank’s bond purchases dropped off to just more than R410m in October, under the bond buying programme introduced to ease stresses in the market in the wake of the initial panic spurred by the coronavirus crisis.

The purchases are down from September’s R653m and remain well below the about R11bn bought each month after the programme was first launched in late March.

October’s purchases take the Bank’s holdings of government bonds to about R39.8bn.

Though the buying programme has tapered off in recent months, as pressure in the market has eased, economists have argued the programme should remain open as SA’s public finances remain precarious and are still likely to experience bouts of  stress.

Last week finance minister Tito Mboweni presented his medium-term budget policy statement (MTBPS), which underscored the fragility of the state’s financial position.

Mboweni announced that the government will now pursue a slower path of fiscal consolidation that sees government debt stabilise at a slower pace, and peaking at higher level — reaching 95.3% of GDP in 2025/2026 before declining. This is higher than the peak of 87.4% in 2023/2024 proposed in the June supplementary budget.

To achieve its targets, the state must make substantial spending cuts in the coming years, that, though deemed more realistic than the cuts outlined in June, are still expected to be difficult to achieve.

Notably they hinge on extracting savings from the public sector wage bill, requiring  a freeze in the coming years, which is strongly opposed by public sector trade unions. The state must also deliver on long-promised reforms to boost economic growth and raise revenues.

Observers have expressed scepticism over the state’s ability to achieve its aims

In a recent note responding to the MTBPS the Institute of International Finance warned that the government would have difficulty in meeting both its revenue and spending targets and, as a result, it expected that the government deficits in the coming three years would be “significantly larger” than the targets set out in the MTBPS.   

“The resulting higher financing needs and faster increase in government debt could weigh on market sentiment, intensifying upward pressure on borrowing costs,” it said.

It also warned that government debt could rise much faster than now projected should it be forced to provide more bailout funding to state owned enterprises — resulting in debt stabilising at a much higher 101% of GDP in 2025/2026.

The Bank was forced to intervene after government bonds came under pressure as investors fled to safe-haven assets amid Covid-19 related panic, causing bond yields to breach the 13% mark in late March.

The Bank has maintained that its intervention was not to influence prices, only to improve the functioning of the market.

It has however warned, in its most recent monetary policy review, that the sustainability of the state’s finances — specifically its rising debt levels — was a key risk to the recovery of the economy from the Covid-19 shock.

donnellyl@businesslive.co.za

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