The SA Reserve Bank’s bond-buying activity picked up pace slightly in September, rising off the previous month’s low, data released on Wednesday showed.
The Reserve Bank bond purchases rose to a little more than R653m in September, under the programme introduced to ease stresses in the market due to the initial panic spurred by the coronavirus crisis.
The increased purchases are up from August’s R354m, the lowest levels so far, but remain well below the roughly R11bn bought each month after the programme was first launched in late March.
September’s purchases take the Bank’s holdings of government bonds to about R39.4bn.
Though the buying programme has tapered off in recent months as pressure in the market has eased, economists argue that it is too early to call time on the programme as SA’s public finances remain weak and may still face periods of stress.
Later this month, finance minister Tito Mboweni is due to deliver the medium-term budget policy statement in which he will give more detail on the effect the pandemic and lockdown has had on the state’s already battered finances.
The adjustment budget is likely to be closely watched for details about consolidating the state’s shaky finances and moves on growth-boosting reforms, and could have a bearing on SA’s borrowing costs in the bond market and on the rand.
The Bank was forced to intervene after government bonds came under pressure as investors fled to safe-haven assets amid Covid-19 panic, causing bond yields to breach the 13% mark in late March.
In its monetary policy review released on Tuesday, the Bank said conditions have since improved, as evidenced by reduced bid-ask spreads and higher trading volumes, allowing the Bank to taper its buying programme.
The Bank noted in the review that it has not specifically been targeting bond yields, but the extent to which these have “remained elevated” despite more normal trading conditions, is due to the “high term premium”. This reflects the additional compensation demanded by investors for long-term exposure to sovereign debt, the Bank said.
Bond yields move inversely to their price and reflect the risk associated with holding an issuer’s debt.
Credit rating
Since the Covid-19 shock, SA has lost its last investment grade credit rating and so its place in the world government bond index (WGBI), it noted.
Foreign investors have reduced their exposure to domestic bonds from a peak of 42.8% ownership of the total stock as of March 2018 to 29.9% in August 2020, a level well below the 35.2% recorded in 2012 when SA first joined the WGBI, the Bank said.
“In these conditions, high bond yields speak to the scarcity of capital in SA, in turn related to concerns about the ultimate sustainability of government debt.”
The Bank warned in the review that the sustainability of the state’s finances, specifically, is rising debt levels that are expected to breach the 80% mark this year, is a key risk to the recovery of the economy from the Covid-19 shock.
The state’s high debt levels are likely to affect the recovery through several channels, it said, including confidence effects and uncertainty, as long as SA’s debt sustainability is in doubt; as well as a lower country credit rating and reduced access to foreign savings.
Mboweni warned in the June supplementary budget that if the state fails to enact steep spending cuts and economic reforms, SA’s debt levels could pass 140% of GDP before the decade is out.
The Bank said, “The financing needs implied by this scenario would be sharply higher than at present, raising the risk of a sudden stop in funding and the potential for severe damage to the economy.”
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