Business Maverick

Bond yields spike as Mboweni signals worsening debt outlook

By Ed Stoddard 28 October 2020
A digital board shows the DAX Index curve inside the Frankfurt Stock Exchange, operated by Deutsche Boerse AG, in Frankfurt, Germany, on Wednesday, May 30, 2018. As the world ponders whether 2018 is when financial markets finally buckle after a nearly decade-long boom, there’s no shortage of potential crises to keep traders awake at night. Photographer: Alex Kraus/Bloomberg

Finance Minister Tito Mboweni’s Medium-Term Budget Policy Statement (MTBPS) has failed its first crucial test. Bond yields spiked as he grimly outlined a worsening debt outlook. 

As Finance Minister Tito Mboweni began addressing Parliament, the yield on the benchmark 10-year bond was fetching 9.285%, up about 6 basis points on the day, according to data. It then spiked to 9.415% as he spoke, before settling back to 9.28% as his 50-minute speech wound down. The rand also lost ground against the dollar, stumbling from 16.38/dlr to 16.4775 – a one-week low. 

“For markets, the key takeaway is that, all things considered, South Africa’s growing public debt is still a problem,” said Razia Khan, chief Africa economist at Standard Chartered Bank.

The JSE Top-40 index extended losses on the day to be 2.6% lower, but that was probably as much a function as a downturn in global stock markets rattled by surges in Covid-19 cases in key markets such as the US. 

Mboweni warned of a worsening sovereign debt outlook, which means the government will have to borrow more over the next few years, straining the state’s ability to repay lenders what it owes.  As a result, investors will demand a higher risk premium for capital lent to South Africa. Wednesday’s brief spike in bond yields could signal the start of things to come.  

Shawn Duthie, managing director of Africa-focused consulting firm Inyani Intelligence, told Business Maverick: “The spike in South Africa’s bond yield is indicative of investors’ belief that the South African government will struggle to control debt, despite Mboweni’s promises. The government has been kicking the can down the road with regards to needed economic reforms, meaning that it is likely to hit 100% debt-to-GDP ratio by 2025, and it may even rise above 100%. The lack of information in the MTBPS regarding increasing revenue, other than through borrowing, also signals that the numbers presented are more wishful thinking than actual reachable goals.”

Debt is now at a whopping R4-trillion, the budget deficit is 15.7% of gross domestic product (GDP) and gross debt at 81.8% of GDP. That is predicted to rise to 95.3% in 2025. Previously, the debt-to-GDP ratio – the key measure of sovereign sustainability – was seen peaking closer to 87%. So the outlook is just getting worse, and the bond market will demand its pound of flesh as public finances worsen. This has all been compounded by the damage that the Covid-19 pandemic has wreaked on an already-fragile economy.

There had been hopes that the government would reduce its domestic debt issuance this year, but that is no longer the case.

“Higher issuance will stress the market that was even looking for an issuance cut this year,” said Peter Attard Montalto, head of capital markets research at Intellidex. 

George Glynos, head of research and analytics at ETM Analytics, says: “What I struggle with, is understanding how this government believes that building a debt-to-GDP ratio towards 95% assists in reducing bond yields, when by their own admission, the fastest-growing line item in the budget is the interest on debt. It is now rising towards 6% of GDP, and that’s before any capital repayments take place.

“In other words, bond yields could still rise higher this year, which signals a vicious cycle as more debt needs to be raised to pay off existing debt, making debt increasingly expensive.” BM/DM


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