According to the borrowing strategy document for 2024–2025 released earlier this week, the central bank will step up its efforts for government in light of the greater funding requirement by the state.
By comparison, the BoB was authorised to raise P7.05 billion for government in the 2023–2024 financial year, or less than half the target for the current financial year.
Under government’s domestic note issuance programme, the BoB raises debt from the local capital market on behalf of government, through the issuance of treasury bills and bonds in monthly auctions. In September 2020, Parliament increased this programme to P30 billion from P15 billion, acknowledging the effects of the COVID-19 pandemic on the budget.
In February, the P30 billion ceiling was reached and Finance Minister, Peggy Serame, was able to secure an increase to P55 billion from Parliament.
“Under the expanded debt ceiling, government intends to introduce new instruments such as inflation-linked bonds," Serame said last month in requesting legislators to increase the issuance programme.
The borrowing strategy indicates that from the P15.25 billion to be raised this financial year, government’s actual funding needs are P12.83 billion consisting of the P8.7 billion budget deficit, maturing local bonds and foreign loans as well as international obligations such as to the International Monetary Fund.
The balance of P2.58 billion will remain in the government’s account at the BoB.
Under the borrowing strategy, the bulk of the P15.25 billion funding, or 51%, will be raised via long term bonds or those whose maturities range between six and 25 years. A net of P4 billion will be raised via Treasury Bills, the popular shorter term notes whose maturities range between three and 12 months.
While government’s domestic capital raising target is higher this year, overall financing costs are expected to be lower than in previous years.
The BoB and by extension, government, went through a testing period of escalating yields beginning in September 2020 after Parliament doubled the domestic debt programme to P30 billion. A combination of a sovereign credit ratings downgrade, escalating inflation which reached a 14-year peak last year and local bidders’ preference for the South African market, drove yields higher. Higher yields for the debt programme are associated with rising debt costs for government.
The situation was clear as the BoB failed to meet its targets at each of the monthly auctions from September 2020, as it was forced to reject the rising demands for higher yields from the market.
However, since at least July last year, yields have been sliding at the auctions of Treasury Bills and bonds, while the BoB has consistently met its debt targets.
“We have seen a decline in the stop-out yields over the past five or so auctions,” the BoB’s financial markets department director, Lesego Moseki, previously told BusinessWeek. “As funds continue to flow from the PFR2, we expect most of the returning funds to flow into the bond market and therefore yields will continue to trend lower. “We also expect inflation to be generally contained within the target and if it’s contained and market expectations are also in line, there should be no upward pressure on yields.”
Under changes to the Retirement Funds Act, local pension funds have until December 2027 to invest a minimum of 50% of their assets domestically. Known formally as the Pension Fund Rule 2 or PFR 2, the Non-Bank Financial Institutions Regulatory Authority statute previously required pension funds to invest at least 30% of their assets locally.
Inflation, meanwhile, dropped to a seven-month low in March at 2.9 percent, thanks to base effects associated with a deceleration in the prices of fuel and food.
