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SA Treasury may reduce borrowings

Now that the National Treasury has garnered an extra R10 billion in the tax coffers than expected it is likely to borrow less offshore.

As intimated in last February’s budget the Treasury was planning to raise US $1,5 billion on offshore markets, up from the $1billion issued the previous year.  Observes Arno Lawrenz, Old Mutual Asset Managers (SA) head of fixed interest, “However, given the much lower than expected budget deficit Government may well decide to reduce the amount it planned to borrow offshore.”

The timing could be fortuitous as seen by those who think the rand has pretty well peaked; any weakening in the currency would obviously increase the rand value of any foreign liabilities.

In any case the cost of foreign debt has recently increased: risk premiums contained in the Emerging Market Bond Index (EMBI) are higher; and, SA sovereign debt spreads have also began widening.

Reducing the amount of planned offshore funding is just one of many options open to government.

Mr Lawrenz emphasises that one of the reasons government is well funded is that its fiscal prudence and appropriate policy choices of the past few years has helped to create an environment of a firm currency, low inflation, low interest rates and strong consumer demand in the economy. SARS has also helped through much more efficient and effective revenue gathering drive.

Nor should we forget that the full effects of the structural adjustment in interest rates over the past two years have still to work through the economy, “which means there’s more to come,” he adds,

Bond portfolio manager Wikus Furstenberg says reducing its funding requirement is only one option. He points out that Treasury could also adjust spending targets upwards in October if necessary. For instance, he suggests government could accelerate the respective three-year spending programmes rather than sit on the cash for a year; although there remains the apparent bottle-neck in the capacity of departments to spend funds already allocated to them for this purpose.

Other options could be to transfer some of the available cash to assist Eskom and Transnet in funding their respective infrastructure projects.

Adds Mr Lawrenz, while the revenue overrun is a positive factor from a balance sheet point of view, any potential reduced funding requirement is unlikely to turn around the short-term trend in bond yields, which were negative in March. “If the announcement had happened three or four months ago, the market would have rallied. But the capital market has been skittish ever since the US Federal Reserve revealed its inflationary concerns, and oil prices are reaching new highs. The news of the cash surplus may have slightly halted the move in yields but is unlikely to have a significant impact in the short-term.”

JP Morgan calculates that the SA bond market lost 2,5% in March versus developed market bonds’ 1,3% during the month. Domestic bonds are down 1,8% year-to-date compared with the global bond index’s 2,5% decline during the first quarter and the Emerging Market Bond Index’s fall of 1,3%.