Ashburton Investments, the asset management business of FirstRand, has flagged several domestic factors, including the implementation of National Health Insurance (NHI), which it says pose a risk to the government’s balance sheet.
The company, which holds government bonds, said in its quarterly report several domestic factors keep it defensive on SA bonds.
"One such factor is a shortfall in revenue collections and some additional spending on the wage bill front that raises the risk for additional SAGB [SA government bonds] and ILB [inflation-linked bonds] issuance post the November MTBPS [medium-term budget policy statement]," the firm said.
"Intentions around launching an NHI that will be an unpalatable burden on the fiscus and debt overhang of municipalities are issues that pose risk to the sovereign balance sheet if we look beyond the medium-term expenditure framework at a time when the commodity cycle is no longer accretive from a corporate income tax take perspective."
One of the issues the National Treasury has to address is the ballooning budget deficit and national debt, as corporate tax revenues lag far behind expectations while load-shedding, a tough global environment and logistical problems have affected profitability.
Mining houses, which last year paid R110bn in corporate taxes and royalties, have been reporting lower taxes due tolow commodity prices, while Transnet’s rail woes have also hurt export volumes.
RMB Morgan Stanley has estimated that taxes from the sector will come in at R50bnthis year.
The National Treasury started monthly switch auctions in August that will last until March 2024. The switches are meant to minimise the government’s cost of funding.
"Larger auction sizes at a time when bid/cover rations are waning, and local banks and institutions are already carrying a heavier burden towards funding government are aspects that lead us to anticipate the curve to steepen further or remain steeper than in previous SARB [Reserve Bank] cutting cycles," Ashburton said.
The Bank said a few months ago local investors may be unable to fill the gap left by foreigners dumping government bonds as the economy weakens due to constant power cuts.
Foreign investors have been selling SA government bonds since 2019, the central bank said in its financial stability report, flagging this as "a significant structural shift, especially considering the significant increase in government bonds issued during this period".
The bank’s data shows that since November 2022 local financial institutions, excluding banks, have significantly increased their holdings of SA government bonds.
Domestic unit trusts accumulated almost half of the R73.26bn of SA sovereign debt issued in the past six months, while pension funds gobbled up 21% and long-term insurers 10%.
The head of SA’s largest fixed income manager, Stanlib, told Business Day in September that if investors sense a sovereign default is likely to occur, this may also prompt local ones to shy away from buying government bonds, which will be catastrophic because borrowing costs will become untenable.
PSG Asset Management has also warned that the combination of public debt that is fast approaching 80% of GDP and low economic growth projections might see investors question whether government bonds remain a sound investment.
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