Larger bond sales not enough to fill Covid-19 gaps
• Auctions may need to be as much as R1.7bn higher
Though the Treasury has announced stepped-up bond issuance, more is likely to be needed to cover the effects of the coronavirus economic slowdown and the looming hole it will create in the government’s revenues, analysts warn. On Friday the Treasury announced increases in its weekly auction levels, raising the amounts issued for its fixed-rate and weekly inflation-linked bond auctions. The increases, however, are intended to cover the deficit announced in February’s budget, which was forecast at 6.8% of GDP, and are unlikely to cover the toll the coronavirus containment efforts are expected to take on the state’s finances.
Though the Treasury announced stepped-up bond issuance on Friday, more will likely be needed to cover the effects of the coronavirus economic slowdown and the looming hole it will create in the government’s revenues, analysts warn.
On Friday the Treasury announced increases in its weekly auction levels, raising the amounts issued for its fixedrate and weekly inflation-linked bond auctions. The increases, however, are intended to cover the deficit announced in February’s budget, which was forecast at 6.8% of GDP, and are unlikely to cover the toll the coronavirus containment efforts are expected to take on the state’s finances.
The Treasury said on Friday its fixed-rate government bond auction amount will be increased by R1.57bn to R6.1bn from May 19, while its weekly inflation-linked bond auction amount will be increased by R360m to R1.4bn from May 15.
But early estimates from the SA Revenue Service (Sars) suggest there will be a R285bn revenue shortfall in 2020, which economists argue could push SA’s government deficit well into double digits.
Sanisha Packirisamy, an economist at Momentum Investments, says the deficit is likely to hit the mid-teens and could require the weekly size of bond auctions to be in the region of R1.3bn-R1.7bn higher.
The Treasury’s other option is to draw down on its cash balances, but no announcement has been made in this regard, she said.
The Treasury said it will release a revised funding strategy subsequent to the tabling of an adjustment budget in parliament in the coming months. The adjusted budged is expected to outline the ramifications of the pandemic for the state’s books.
Nolan Wapenaar, co-chief investment officer at Anchor Capital, warned that market appetite for government debt could turn, particularly in the longer term, as its debt sustainability deteriorates.
“Increased issuance is bad,” he said.
Though the market is now well bid, the government is fast becoming “maxed out” in terms of the debt it can access, he said.
“There is only so much access to debt you’ve got, and the government has pretty much maxed out those access points,” he said.
Wapenaar estimates that the government’s debt-to-GDP levels, excluding state-owned entities, are likely to reach between 75% and 80% by the end of 2020.
Though investors may be forgiving during this crisis period, SA will get to a point where “debt service costs will become unsustainable and the whole thing collapses in on itself”, he said.
The Treasury’s announcement followed on from data published by Sars on Friday that showed it had bought R11.4bn in government bonds in April. The Bank stepped into the bond market as part of measures announced in late March aimed at increasing liquidity in financial markets that were reeling from the effects of Covid-19 panic.
These liquidity measures included the announcement that it would begin buying government bonds in the secondary market — in other words from banks and asset managers — after buyers for government bonds all but disappeared, sending yields skyrocketing.
April’s purchases take the Bank’s holdings of government securities to R20.6bn and came in the month SA exited the FTSE Russell World Government Bond Index after ratings agency Moody’s Investors Service downgraded it to junk status.
LIFT SENTIMENT
The confirmation of continued bond purchases — up from the R1.1bn bought in March — is likely to lift market sentiment, Absa said in a note.
The Bank has not provided a public target for the amount of bond purchases it intends to make and has maintained that the measures are only to address “dislocation” in the market, rather than finance the budget deficit. It has, however, committed to continued purchases as long as it deems necessary, to ensure the proper functioning of the market.
Wapenaar said the purchases were bigger than expected, particularly as there was a muted reaction to SA’s exit from the bond index. Nevertheless, at R20.6bn, the Bank’s holdings of government securities were “a drop in the ocean”, he said.
EARLY ESTIMATES FROM THE SA REVENUE SERVICE SUGGEST THERE WILL BE A R285BN REVENUE SHORTFALL IN 2020