RAND SLUMP 2% ON GOVERNMENT PLANS TO RAISE DEBT

Local risk-assets sold off sharply on Wednesday afternoon, with the yield on the benchmark R186 government bond rising to a two-month high as finance minister Tito Mboweni began delivering his budget speech.

The rand had been trading at R14.16/$ shortly before Mboweni began speaking. At 2.15pm it had fallen 2.27% to R14.3661/$, while the yield on the government’s 10-year bond, due in 2026, rose  above 9% for the first time since December 2018.

The R186 was bid at 9.05%, 2% weaker than its close of 8.865% on Tuesday.

The government plans to increase the issuance of long-term debt by 18% over the next year to R2.16-trillion as it seeks to plug the budget deficit. This action comes within the context of low growth and tax revenue collection, the National Treasury said.

Gross national debt will increase to 60.2% of GDP by 2022, from 55.6% in 2018/2019. In the past year, the government’s gross borrowing requirements have risen by R15.3bn to R239.5bn. “Government continues to manage its debt and meet the country’s financing needs in a sustainable and responsible manner,” the Treasury said.

International benchmarks for deficit and debt levels are 3% of GDP and 40% to 55% of GDP, respectively, according to Investec economist Kamilla Kaplan.

The Treasury has revised down its growth forecast for 2019 from 1.7% to 1.5%. Over the medium term, growth is expected to increase to 2.1% by 2021. Meanwhile, the tax revenue estimate for 2018/2019 has been revised down by R15.4bn compared to October’s medium-term budget policy statement (MTBPS).

The government debt is also affected by changes in inflation, interest-rate fluctuations and the exchange rate. The rand was described as the most volatile currency among emerging markets last year, while inflation increased on higher oil prices. In response, the Reserve Bank’s monetary policy committee pre-emptively increased interest rates for the first time in two years in November.

Over the medium term, long-term debt will increase by a further 17.5% to R2.54-trillion, an increase of 40.7% from 2018.

Domestic long-term borrowing consists of fixed-rate, inflation-linked and retail savings bonds. In 2018, fixed-rate instruments accounted for 81% of bond issuance.

The government will also raise finance in the international capital markets to fund its foreign-currency commitments. Overall for 2018, it issued $4bn in foreign bonds. In the medium term, government will raise an additional $8bn in global capital markets.

“This is in line with the average for recent years. The amounts aren’t unprecedented,” said the treasury’s head of assets and liabilities, Tshepiso Maohloli.

“Over the past year, developing economies experienced market volatility emanating from uncertainty over US monetary policy, US-China trade tension, and Brexit. As a result, borrowing costs and currency volatility rose,” the Treasury said