Treasury’s timing spot on as global easy money returns
The Treasury borrowed $5bn (roughly R75bn) worth of bonds on international capital markets this week, with $2bn maturing in 2029 (10-year) and $3bn maturing in 2049 (30year). This is the biggest euro bond SA has issued, which for the Treasury is a show of confidence. I agree in part, but raising funding has never really been an issue; it is the price of that debt that matters.
Those outside financial circles have been talking and mostly bemoaning the Treasury piling on foreign debt when it needs to reduce it. There is some validity in that thinking, but it fails to understand the Treasury’s job of managing the fiscus, which includes managing refinancing or funding risk. To reduce debt does not mean a country must not meet its funding requirements in the interim, or that it should not take advantage of better pricing when the market allows. The Treasury has done exactly that.
Also, of the $5bn it issued, $1bn had been planned for future issuance, but it opted to prefund because the bonds were 2.7 times oversubscribed. Certainly, there was better pricing and higher demand for the bonds, but there are other considerations that could have influenced that decision.
The medium-term budget policy statement in October has been delayed by a week, and some analysts sense this could be due to difficulties in budget negotiations given that the Treasury has asked government departments to cut spending by no less than 5% in each of the next three years. It’s a plausible scenario, given that cuts will negatively affect departmental programmes. However, the official response is that the president will be out of SA on the day the statement was to be presented. This makes sense, and there should not be any doubt that it is the case.
There are many moving parts in the coming statement. At 0.5%-0.8% in 2019, real economic growth is likely to be about a third of the 2019 Budget Review forecast. Inflation, which influences nominal economic growth and therefore tax revenues, is also lower. Tax buoyancy the amount of tax revenue the SA Revenue Service will collect on behalf of the Treasury for every rand’s growth will probably come out lower than the assumed 1.31. If we add bailouts of stateowned companies to the mix, the picture will probably look somewhat uglier than in the February Budget Review. Local factors are not conducive and both the finance minister and the revenue commissioner have warned of tough times ahead.
Outside SA, the dominant risks for markets during most of 2019 have been the US-China trade wars, and the Brexit fiasco. The trade wars continue to induce volatility in markets; UK courts found Prime Minister Boris Johnson’s suspension of parliament unlawful; and US President Donald Trump faces impeachment. All these factors result in declining risk appetite and influence the Treasury’s ability to issue bonds at favourable prices.
The one global theme that helps SA and other emerging markets is the synchronised monetary policy support central banks have embarked on. The US Federal Reserve (Fed) cut rates by 25 basis points for the second time in a row, though it did not commit to further cuts or hint at quantitative easing. The European Central Bank did a little more by cutting rates by 10 basis points to -0.5%, and reinstating quantitative easing worth €20bn a month with no fixed end date.
In emerging markets, more than a dozen central banks have cut rates. It seems as if we are returning to the era of cheap money, which will result in increased demand for emerging market debt and declining yields. SA is not alone on this wave of borrowing. Abu Dhabi borrowed $10bn, and Bahrain and Kazakhstan are looking to take advantage. For the Treasury, the timing could not have been more opportune.