The Bank of America expects SA’s perceived credit risk to widen, saying tensions within the government of national unity (GNU) and high government debt might see a 20 basis point (bps) widening in asset swap spreads — a bad omen for outflows in the bond market.
The lender said the recent budget left the planned sizes of fixed-rate bonds unchanged and this should support ASW spreads [the difference between the bond’s yield and the corresponding swap rate, which effectively measures the credit risk of the bond.]
However, the Bank of America believed there was room for SA’s ASW spread to widen further in the medium term given that the budget deficit and government debt were still high.
“ASW spreads have widened lately, but they remain tight relative to recent history. Tensions within the GNU (evident in the process of budget adoption) justify about 20bps of further widening of ASW spreads (on average), in our view. However, in the short term the unchanged amount of fixed-rate bond auctions is likely to anchor ASW spreads at current levels,” it said.
The Bank of America’s views comes as data collated by Bloomberg showed that major US institutional investors, including JPMorgan and Wells Fargo, dumped SA bonds in the first quarter of the year, fuelling outflows at a rate not seen since last year’s general election ushered in the GNU.
The research report by Bank of America said it viewed the fiscal stance after the budget speech last week as broadly unchanged despite a net increase in spending.
“Multiyear spending questions were answered: the social relief of distress grant was made permanent; the increased wage bill was accommodated; and Eskom’s allocation was reduced. Also, no new allocations to Transnet demonstrates the continued spending grip,” it said.
“The increase in spending has been partially financed by a small VAT hike (0.5% per year) and higher PIT [personal income tax] revenues.”
The move by the National Treasury to increase the VAT rate by 0.5% to 15.5% on May 1 2025, and by another 0.5% to 16% on April 1 2026, has put the ANC in conflict with the DA — its main partner in the GNU.
The disagreement between the ANC, the DA and some other parties in the GNU sets the scene for a protracted two weeks as parliament has 16 days to approve or amend the budget.
Revenue gap
“The minister of finance [Enoch Godongwana] will have two days to respond to any possible amendments. Passing the budget will now depend on political discussions among GNU members over the next two weeks,” Bank of America said, warning that dropping the VAT hike could lead to a R13.5bn revenue gap.
“We think the fiscal framework is likely to be maintained despite potential changes in tax measures and spending cuts. The main budget deficit target is in line with our expectation: 2025/26 forecast at minus 4.4% of GDP, marginally higher than our expectation of minus 4.5%,” it said.
Another risk to the budget flagged by Bank of America is the Treasury’s growth projections. It said the real GDP growth forecast of 1.9% in 2025 is “optimistic, which could affect revenue collections”.
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