A now cash-flush South African National Treasury may well decide, as one of the options available to it, to reduce the amount it planned to borrow offshore this year given that it has a much lower Budget deficit to fund after getting an extra R10-billion in the tax coffers than expected, according to Arno Lawrenz, Old Mutual Asset Managers South Africa’s (Omam SA) head of fixed interest.
Minister of Finance Trevor Manuel announced on Friday that the government has collected about R10-billion more than expected in its February 2005 Budget for the 2004/05 financial year, lowering its estimated Budget deficit to only 1,6% of gross domestic product (GDP) from a previously expected 2,3% of GDP.
Commenting on the Treasury’s options on Thursday, Lawrenz noted that in February’s 2005/06 Budget announcement, the Treasury indicated it was planning to raise $1,5-billion on offshore markets, slightly higher than the $1-billion issued in previous years.
“Government may choose to only do a portion of this now that it has lower funding needs this year,” said Lawrenz.
The timing was fortuitous, he pointed out, in that the rand had already reached strong levels and any future weakening in the currency would increase the rand value of foreign loan liabilities.
At the same time, risk premiums as measured in the spreads on the Emerging Market Bond Index, and in South Africa’s sovereign debt spreads, also began widening during the first quarter of the year, making the current issuance of foreign debt more expensive.
Reducing the amount of planned offshore funding was just one of many options that confronted a government that now has extra money on its hands.
“Government doesn’t need a deficit of less than 2% of GDP at this stage of our socio-economic development,” said Lawrenz. “That puts it in the fortunate position of having options and it is likely to use those options depending on its macroeconomic and social development priorities.”
He added that the government has already shown a determined ability to make tough choices, “and we have no doubt that whatever option it decides on, it will reinforce the positive trend in international perceptions about the country”.
Lawrenz also emphasised that one of the reasons that the government is sitting in this position — with excess cash — is that its fiscal prudence and appropriate policy choices of the past few years have helped to create a positive spiral of a firm currency, low inflation, low interest rates and strong demand in the economy.
“Sars [the South African Revenue Service] has also helped in its seemingly never-ending efficiency drive,” he elaborated. “However they decide to use the cash, it will hopefully be supportive of this positive spiral. Don’t forget that the full effects of the structural adjustment in interest rates that took place over the past two years haven’t fully played out, which means there’s more to come. ”
Omam bond portfolio manager Wikus Furstenberg pointed out that the National Treasury could also adjust spending targets upwards in October, if necessary.
For instance, he suggested the government could accelerate its spending under the three-year Medium-Term Expenditure Framework rather than sitting on the cash for a year.
Whether the government will allocate extra money to much-needed infrastructure maintenance is less certain because of the apparent lack of capacity to spend funds already allocated for this purpose, he noted.
Other options could be to transfer some of the available cash to assist Eskom and Transnet in funding their respective infrastructure projects.
Said Furstenberg: “In the past, they have been quite flexible in the way they have handled their funds, often in a way that has not been that obvious to the market.”
Lawrenz added that, 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 South African government bond yields, which was negative in March.
“If the announcement had happened three to four months ago, the market would have rallied. But the capital market has been skittish ever since the United States Federal Reserve revealed its inflationary concerns last month and oil prices reached new highs.
“The news of the cash surplus may have slightly halted the move in yields, but it is unlikely to have a significant impact in the short term,” he predicted.
JP Morgan calculates that the South African bond market lost 2,5% in March versus developed market bonds’ decline of 1,3% during the month. Domestic bonds were 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%. — I-Net Bridge