MTBPS is neutral for the bond market: There were no major surprises in the MTBPS for F24/25, in as much as the bond market was leaning towards a reduction in bond supply due to an increase in the cash balance. Our base case was for bond supply to remain unchanged. We anticipated minor revisions to the projections, which were slightly worse than anticipated. The small slippages should be seen in the context of National Treasury’s focus on restoring fiscal credibility, which has deteriorated in the past years due to large SOE bailout and public sector wage increases, which were not in the baseline forecasts. The MTBPS provides continuity from the February 2024 budget, emphasising National Treasury's commitment to fiscal consolidation and stabilising the debt-to-GDP ratio by F25/26. However, revisions were made to the February 2024 forecast, with fiscal ratios projected to be weaker and slightly worse than ICIB's projections. This can be ascribed to an expected shortfall in tax receipts and a small increase in spending.
The GDP growth forecasts align with the SARB, IMF and Bloomberg consensus, none of which shows more optimistic reform implementation as policy announcements are not baked into baseline forecasts. We are disappointed that the rerating of government bonds and the rand post the formation of the GNU have not translated into an improved trajectory for debt servicing costs and debt-to-GDP ratio due to the higher borrowing requirement.
Market reaction: There was a brief kneejerk reaction from SAGB yields, which rose by 10bps, and the ZAR traded above R17.70/$. However, the market settled relatively soon thereafter, and yields ended the day ~4bps higher and the ZAR at R16.68/$. We think that SAGB yields will consolidate in a trading range, with the R2035 trading between 10.1% and 10.70%. The fiscal rerating post-GNU is complete in our view, with the improved inflation outlook, rate cut expectations, and high real yields lowering volatility risk at the top end of our range. This has also allowed for a narrowing in the SA/US10-year generic spread to ~620bps compared to an average of ~700bps post-COVID-19. Moody’s and S&P rating reviews are published in November. However, we think this is more of a late 2025 story when there is more evidence of the implementation of structural reforms which will reflect in a rise in the fixed investment-to-GDP ratio, which is currently at 14.9%.
Timeline we are watching for PPP framework and financing of infrastructure projects
- The revised PPP framework will be published in November 2024 and implemented in F25/26, and a consultation paper on infrastructure loans will be released before February 2025.
- National Treasury is looking at government's borrowing for infrastructure programmes and capital budget that will be funded through the budget. It examines infrastructure bonds, bilateral loan financing, and concessional funding from IFIs and multilateral development banks. An RFP will be issued before end-November 2024 with details for selected projects and programmes.
- A consultation paper on infrastructure financing will be published before the February 2025 Budget.