The more subdued market response is most likely because much of the good news was already priced into the market; however, this is not to say that the good news and intentions will not percolate through and result in longer term positives for government bonds and the currency.
While markets probably expected the news to be good at some level, the Minister’s tone and message were more positive than people expected. That said, there are still questions that need to be answered.
One of these is the execution risk in the consolidation plan, specifically around the public sector wage bill.
A positive from the Budget speech was the decision to make full use of the revenue overrun to help reduce debt. It would have been easy for National Treasury to use the windfall to prop up state entities rather than biting the bullet by sticking to its austerity measures. Had this happened, this could have placed further pressure on bond yields.
The bond market will look acutely at the debt-to-GDP guidance, and given that we are now stabilising at around 88% rather than the 95% given in October, markets will positively discount that into bond prices.
The risk of a debt trap has diminished, and with the economic reforms coming through, yields should continue to benefit. This will reinforce the search-for-yield theme we’ve seen in the market.
With the risk of default now somewhat decreasing, SA government bonds will become even more attractive to international investors. Given the improved fiscal position, our bonds will likely see a reduced issuance, which will be good for borrowing costs as well. Overall, this has a positive outcome for bonds.
An additional positive outcome for the country will be the impact of Operation Vulindlela that the Finance Minister had announced in last year’s Budget speech. President Cyril Ramaphosa added some much-needed meat to the bones of this plan in his State of the Nation Address (SONA) earlier in the month, giving the market greater confidence in the projected results.
This detail is crucial to understanding how the plan will help to spur economic growth, and thereby stabilise government debt.
The details of this plan were expanded on in the President’s speech, indicating that it would be focusing on reforms in the electricity, water, telecommunications and transport sectors. These initiatives aim to bolster the capacity and efficiency of the electricity, water, telecommunications and transport sectors.
Visible action on this front would go a long way to giving effect to the Budget and SONA intentions, and thereby give investors the confidence they need. That would in turn feed into positive sentiment that could support equity, bond and currency markets over the longer term. BM
This article was written by Jason Swartz, Macro Investment Strategist, Old Mutual Investment Group