Rand initially slumps 2% on government plans to raise more debt
Issuance of long-term debt will be raised 18% over the next year to plug the budget deficit
Local risk-assets sold off sharply during Tito Mboweni’s budget speech on Wednesday afternoon, before recovering to about where they were when he began speaking.
The yield on the benchmark R186 government bond rose to a two-month high, but analysts cited positive news on bailouts for Eskom as a reason that ratings agencies may spare SA from further downgrades.
The rand had been trading at R14.16/$ shortly before Mboweni began speaking. At 2.15pm it had fallen 2.27% to R14.3661/$, while the yield on the government’s 10-year bond, due in 2026, rose above 9% for the first time since December 2018.
The R186 was bid at 9.05%, 2% weaker than its close of 8.865% on Tuesday. By 3pm, the rand was back at R14.16/$, while the R186 was bid at 8.89%, unchanged from its level before the speech.
The government’s plans for Eskom are financially responsible, and thus well received by the market, said Monex Europe foreign exchange analyst Simon Harvey.
“The initial sell-off looked sharp, but the main event is likely to occur on March 29 when the potential ratings downgrade by Moody’s Investors Service will be announced,” said Harvey.
Eskom’s future is a key issue being watched by the market, as Moody’s — the only ratings agency to have SA’s sovereign credit status at investment grade — has highlighted the risks posed by the state utility to the fiscus.
The state had seemingly walked “a tightrope between the fiscal risks of an unconditional bailout and the political backlash from job-cutting prior to this year’s elections”, Harvey said.
The government plans to increase the issuance of long-term debt by 18% over the next year to R2.16-trillion as it seeks to plug the budget deficit. This action comes within the context of low growth and tax revenue collection, the Treasury said.
Mboweni had, however, said funding to Eskom will be in the form of bridging loans rather than simple bailouts. Funding for the embattled power utility is also conditional on cost-cutting and restructuring.
SA’s gross national debt will increase to 60.2% of GDP by 2022, from 55.6% in 2018/2019. In the past year, the government’s gross borrowing requirements have risen by R15.3bn to R239.5bn.
“Government continues to manage its debt and meet the country’s financing needs in a sustainable and responsible manner,” the Treasury said.
International benchmarks for deficit and debt levels are 3% of GDP and 40% to 55% of GDP, respectively, according to Investec economist Kamilla Kaplan.
The worsening of the budget deficit is largely due to the R23bn annual allocations going to Eskom, said Nedbank Group Economic Unit analysts. There were, however, tough new expenditure controls to compensate for this, the analysts said.
The Treasury has revised down its growth forecast for 2019 from 1.7% to 1.5%. Over the medium term, growth is expected to increase to 2.1% by 2021. Meanwhile, the tax revenue estimate for 2018/2019 has been revised down by R15.4bn compared with October’s medium-term budget policy statement.
The government debt is also affected by changes in inflation, interest-rate fluctuations and the exchange rate. The rand was described as the most volatile currency among emerging markets in 2018, while inflation increased on higher oil prices.
Volatility in the market has increased despite some support in the form of dovish signals from many central banks, including the US Federal Reserve.
In response, the Reserve Bank’s monetary policy committee pre-emptively increased interest rates for the first time in two years in November.
Over the medium term, long-term debt will increase 17.5% more to R2.54-trillion, an increase of 40.7% from 2018.
Domestic long-term borrowing consists of fixed-rate, inflation-linked and retail savings bonds. In 2018, fixed-rate instruments accounted for 81% of bond issuance.
The government will also raise finance in the international capital markets to fund its foreign-currency commitments. Overall for 2018, it issued $4bn in foreign bonds. In the medium term, the government will raise an additional $8bn in global capital markets.
“This is in line with the average for recent years. The amounts aren’t unprecedented,” said the Treasury’s head of assets and liabilities, Tshepiso Maohloli.
“Over the past year, developing economies experienced market volatility emanating from uncertainty over US monetary policy, US-China trade tension and Brexit. As a result, borrowing costs and currency volatility rose,” the Treasury said.