South African Bonds Extend Losses on Tax Warning

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Tuesday saw more falls in South African bonds as a senior official revealed that tax collection is falling well short of expectations, raising worries that the government may issue more bonds to a nearly saturated market.
After the National Treasury sounded the alarm about the budget deficit last week and warned government ministries that they would need to cut expenditures, the South African Revenue Service’s deputy commissioner, Johnstone Makhubu, issued the warning. Due to recurring power interruptions that reduced economic productivity, tax income increased 2.6% through August instead of the budget’s 6% prediction, Makhubu told Business Day newspaper.

Since the government hinted in February that it would borrow more money in the future to support a debt-relief plan for struggling state-owned electrical utility Eskom Holding SOC Ltd., bond yields have increased. According to a warning from the South African Reserve Bank, the domestic market is almost at the point where it can no longer support any more debt.

According to Rashaad Tayob, head of fixed income at Foord Asset Management, “the consistent supply of bonds to the market is overwhelming demand.” Across income and multi-asset funds, pension funds, and banks, bond allocations have significantly expanded in recent years. There is currently little room for growth.

The 2044 bond yield increased by four basis points on Tuesday to reach 12.73%, the highest closing yield since July 2. This week saw the biggest increase in the margin over the 2026 yield in more than two years, rising to 370 basis points.

Director-General Duncan Pieterse of the Treasury said on Tuesday that investors already had ” resistance ” to the state’s expanded issuing.

Pieterse maintained that the government had to decide between reducing expenditure, raising taxes, or expanding debt in an online briefing to the media. “Resistance in a bond market is through bids we receive for our debt,” he added. They do this by engaging in aggressive bidding, seeking a greater return, and thus paying less for the debt we issue. People oppose by requesting considerably lower prices at every point along the yield curve.

Due on November 1, the medium-term budget statement might provide further information regarding the nation’s poor economic growth, high projected debt levels, and weak government finances. Compared to the February budget forecast of 4%, the deficit estimate is expected to be revised “closer to 5% of GDP,” according to Investec Chief Economist Annabel Bishop.

Company Taxes
Questions are being raised about domestic company tax collection and the viability of the 2024 federal budget, according to Nolan Wapenaar, chief investment officer at Anchor Capital. “At this point, it is obvious that there will be a significant shortfall in revenue.”

Last week, the Treasury informed government agencies that the 2023 budget’s spending cap would stay in place, no new resources would be made available, and that current baseline budgets would be reduced to make up for the funding gap.

However, the African National Congress, now in power in South Africa, may find it difficult to rein down expenditures given that elections are scheduled for that country’s parliament to be held the following year. Recent polls have shown that the party faces losing its national majority for the first time since it came to office in 1994. Financial pressures will increase due to efforts to prolong Covid-era social security payouts and a salary increase for government workers that is more than projected.

Wapenaar claims that South Africa’s options for increasing debt issuance are limited. According to the report, government debt is already beginning to squeeze out other creditors and the whole economy.

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