South African government bond yields are climbing ahead of this week’s adjusted budget as investors contemplate what could be the widest fiscal deficit since World War I.
The country is already borrowing at a rate of more than R1 billion a day, but even that may not be enough to plug a hole in government finances of as much as 15% of gross domestic product, according to Investec.
Finance Minister Tito Mboweni warned of deep spending cuts when he presents the adjusted budget on Wednesday, but investors are also concerned about an increase in borrowing. While weekly debt sales - now totaling 7.5 billion rand in nominal and inflation-linked securities - remain oversubscribed, the local market doesn’t have infinite capacity to absorb fresh issuance, according to Anchor Capital.
"In the short term, the government will have no choice but to live on debt," said Nolan Wapenaar, chief investment officer at Cape Town-based Anchor, which oversees about R60 billion. "However, its current pace of borrowing is not sustainable and even our domestic market will, at some point, battle to finance government at the current pace of bond issuance."
Yields on benchmark 10-year rand notes have climbed 68 basis points from a one-year low on June 3 to 9.3%, the highest among major emerging markets monitored by Bloomberg. That makes South African bonds the worst performers in the period, with a negative return of 7% compared with an average loss of 0.6% among developing nations.
The adjustment budget Mboweni is preparing will redirect R130 billion of spending to the R500 billion coronavirus stimulus package President Cyril Ramaphosa announced in April. The fiscal deficit is likely to exceed 10% of GDP in the fiscal year through March 2021, according to the Reserve Bank. The largest gap on record was 11.6% of GDP in 1914, followed by 10.4% in 1940.
With the economy set to contract by about 7% this year, tax revenue may fall as much as R300 billion rand short of the estimate given in February, according to Standard Bank. The Treasury plans to make "very serious and unusual changes" to its expenditure plans, Mboweni told lawmakers on Thursday.
"Bond yields will be the yardstick against which we can measure both his performance and South Africa’s prospects as a country," said Anchor’s Wapenaar.