Budget Review 2024: How to sidestep a fiscal cliff on the near horizon

The February 2024 budget was primarily aimed at fiscal consolidation amidst sluggish economic growth. The increasing debt trajectory, coupled with high funding costs due to a substantial gross financing need and elevated country risk premium, prompted the National Treasury to activate the Government Finance Emergency Contingency Reserve Account (GFECRA). By deploying GFECRA, R150 billion will be distributed to the National Treasury, which is expected to reduce debt servicing costs by R33 billion over the Medium-Term Expenditure Framework (MTEF) period.

Although the GDP growth rate is forecasted to improve to 1.3% in 2024 from an estimated 0.6% in 2023, partly thanks to reduced load shedding and anticipated interest rate cuts in the second half of 2024, this level of growth remains insufficient. More robust economic expansion is necessary to stimulate private sector fixed investment and employment. Emphasis has also been placed on the private sector's involvement in improving South Africa's infrastructure. The urgency of accelerating reforms is highlighted, as the use of GFECRA is seen as a temporary measure to maintain financial stability while awaiting the acceleration of economic growth.

The application of GFECRA funds has enabled the National Treasury to redirect savings from debt servicing towards the public sector wage bill, particularly in labour-intensive departments. However, there is concern regarding the reduction in the capital expenditure (capex) budget throughout the MTEF period, despite the fact that its average growth rate of 10% outpaces the current spending growth rate of 5%. 

The gross debt-to-GDP ratio is projected to be 2.8% lower than previously forecasted, landing at 74.7% of GDP in the fiscal year 2026/27. Debt servicing costs are expected to stabilise at 21.1% of revenue, which remains high but shows a slight improvement from the 22.1% forecast in the MTBPS. This indicates that the financial strategies implemented, including the utilisation of GFECRA, are positively impacting the country's fiscal health, particularly in terms of managing debt levels and servicing costs.

Financing of the gross borrowing requirement: GFECRA and the country-risk premium 

We noted in our Budget Preview that the financing strategy is challenged by the high cost of funding and the issuance of low-coupon bonds. The increase in the discount on SAGB funding bonds from R20bn to R60bn in F23/24 has led to a larger reliance on FRNs (R66bn) and a new rand Sukuk bond (R20bn). The borrowing requirement has decreased by R98bn from R560bn to R458bn due to the distribution of GFECRA. The mix of funding is forecast to consist of the following: 

T-bill issuance:  The net increase is set at R33bn. National Treasury projects a net increase of R88bn in F23/24. The increase in F4/25 indicates that the size of weekly auctions will rise during the year. 

Long-term bond issuance:  Cash generated from long-term bond issuance is forecast at R328bn, which is unchanged from R330bn in F23/24. National Treasury announced that the quantum of weekly SAGB auctions will be reduced by R150m to R3.75bn, which amounts to R7.8bn over the 52 funding weeks. The non-competitive allocations hve been increased to 75%. in the primary market the allocation has been raised from 20% and 30% and on the ETP platform from 30% to 45%. The latter is likely to be an attempt to boost liquidity. The term to maturity of the total is forecast to decline to 10.7% from 11.2 years. However, this can be ascribed to a decline in bond issuance relative to the MTBPS forecast. Switch auctions will continue as 20% of long-term debt matures in five years. The quantum of FRNS issued could decline to ~R37bn, and the National Treasury has not yet decided to issue another rand Sukuk bond.

Foreign loans: $2bbn will be issued to finance a redemption of R40.5bn. National Treasury has reduced government deposits denominated in foreign currency from $7.1bn in F22/23 to $4.6bn in F23/24, with a further decrease to $2.1bn projected for F24/25. Funding from DFI or multi-lateral agencies is preferred, due to lower funding costs. 

Bond market dynamics: Longer-dated yields have rallied by ~20bps over the past two days. The SAGB yield curve has flattened by ~20bps over the past two days, of which ~10bps materialised post the GFECRA announcement. Domestic investors expected an increase in bond issuance. However, funding bonds will continue to comprise maturities from 2035 and longer, with more supply emanating from switch auctions. Added to this will be growth dynamics, which is the critical ingredient for a sustained reduction in the risk premium and the return of foreign investors. However, we are of the view that the upside risk to SAGB yields has declined, but the outcome of the election on the 29th of May remains a risk event. Our fair value on the generic 10yr SAGB yield is 10.7% on the assumption of an constructive election outcome.

• General election on 29 May. 
• Transnet: 
  • Leadership appointments at Transnet
  • Introduction of third-party access to the freight rail network by May 2024: 
  • Finalise partnerships with a private company by April 2024 to upgrade Pier 2 of the Durban container terminal. 
• Short-term options for off-balance sheet financing to Eskom to accelerate private sector investment in transmission. A pilot project will be implemented to test the market appetite for the proposed option, with a request for proposals expected to be issued at the end of July 2024.