Bonds weaken sharply as Malusi Gigaba discloses deteriorating fiscal position

South African bonds slumped on Wednesday afternoon‚ as the market reacted negatively to the projections for a higher budget deficit and lower growth for the next three years‚ unveiled by Finance Minister Malusi Gigaba in the medium-term budget policy statement.

Bonds tracked the weaker rand‚ which hit its worst level in 10 months — R13.9942 to the dollar — during Gigaba’s speech.

Bonds also weakened as Gigaba spoke‚ with the R186 reaching 8.9% from 8.86%‚ and were relatively steady one hour into Gigaba’s speech before weakening quickly after the numbers reflected a deteriorating fiscal position.

At 3.11pm the benchmark R186 was bid at 9.1% from 8.835% and the R207 at 7.735% from 7.49%.

The rand was at R13.9439 to the dollar from R13.7691.

Projected GDP growth for 2017‚ forecast at 1.3% at the time of the February budget policy statement‚ has been revised down to 0.7%.

Gigaba said the consolidated budget deficit would widen to 4.3% of GDP in 2017-18‚ against February’s target of 3.1%.

Tax revenue was projected to fall short of the February estimate‚ by R50.8bn‚ in the current year‚ the largest under-collection since the 2009 recession.

The main budget deficit‚ which is government’s net borrowing requirement‚ will be 4.7% of GDP in 2017-18‚ compared with a February projection of 3.5%. Borrowing will need to be R52.8bn higher than expected in the current year‚ mainly as a result of revenue shortfalls.

A deficit of 3.9% for three years thereafter meant government debt levels would rise much faster‚ said Absa Stockbrokers and Portfolio Management analyst Craig Pheiffer.

“Rising government debt levels will keep interest costs as the fastest-growing budget item by far at an average 11% over the next three years and growing to 15% of total budget by 2020-21‚” he said.

Global bond yields were higher ahead of the expected European Central Bank (ECB) monetary-stimulus tapering announcement on Thursday.

The German 10-year bund was at 0.4869% from 0.4748% and the UK 10-year gilt at 1.4274% from 1.3539%.

The US 10-year bond was last at 2.4566% from 2.4156%. - BusinessLIVE