This week National Treasury borrowed US$5 billion (roughly R75bn) worth of bonds from international capital markets, with US$2 billion maturing in 2029 (10-year) and US$3 billion maturing 2049 (30-year). This is the biggest ever euro bond the country has issued, which Treasury has interpreted to mean that it’s a show of confidence on South Africa, and I agree in part. 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 why Treasury is pilling on foreign debt when it needs to reduce it.
Simplistically there is some validity in that thinking but misunderstands 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. National Treasury did exactly that.
Treasury also told us through its media release that of the US$5 billion it issued, US$1 billion was planned for future issuance but opted to prefund for it 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 influence that decision.
The Medium Term Budget Policy Statement in October was delayed by a week to the 30th and some market analysts sense that that could be due to difficulties in budget negotiations given that Treasury has asked government departments to cut spending by no lower than 5% in each of the next three years. It’s a plausible scenario given that expenditure cuts will negatively impact departmental programs. However, the official response from government is that the postponement was done to accommodate the president who will be out of the country on the usual date the MTBPS was supposed to be. This makes sense and there should not be any doubt that’s the case.
There are a lot of moving parts in the upcoming MTBPS. At between 0.5% and 0.8% in 2019, real economic growth is likely to be about a third of what 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 SARS will collect on behalf of Treasury for every one-rand growth in the economy – will likely come out lower than the assumed 1.31. If we add the bailout of the State Owned Companies into the mix, the picture will mostly likely look a bit ugly that the February Budget Review. Local factors are certainly not conducive and both the Finance Minister and the Commissioner of SARS warned us about the tough times ahead.
Outside of South Africa the risks are mixed. The dominant risks for markets during most of 2019 has been the trade wars between the US and China and the Brexit fiasco. The trade wars continue to induce volatility in markets, The UK Prime Minister Boris Johnson’s decision to suspend the UK Parliament was deemed unlawful by the British courts and in the US Donald Trump is facing the prospects of impeachment. All these factors result in declining risk appetite and would influence the ability of Treasury to issue bonds at a favourable price.
The one global theme that help South Africa and other emerging markets is the synchronised monetary policy support that central banks have embarked on. The US Federal Reserve have cut rates by 25 basis points for the second consecutive meeting although it did not commit to further cuts or hint at quantitative easing. The ECB did a little more than the Fed by cutting rates by 10 basis points to -0.5% and reinstituted quantitative easing worth 20 billion euros a month with no fixed end date. In emerging markets, more than a dozen central banks have also cut rates.
Effectively, it seems as if we are returning to the era of cheap money globally, which will result in increased demand for emerging market debt and declining yields. South Africa is not alone on this wave of borrowing. Abu Dhabi borrowed $10 billion, and Bahrain and Kazakhstan are all looking to take advantage and borrow from the yield starved global investors. For Treasury, the timing could not have been more opportune.