- Treasury is reducing its weekly auction of government bonds for the second time since the end of March.
- Government debt has ballooned during the pandemic.
- But thanks to stronger-than-expected tax collection, government does not have to borrow as much as expected.
For the second time in more than a month, the South African government cut the size of its bonds on auction.
This is thanks to better-than-expected tax income, which means it doesn't have to rely as much on new debt as was previously expected.
On Monday, National Treasury announced that it will reduce its weekly auction of fixed-rate government bonds by R900 million - from R4.8 billion to R3.9 billion, starting from next week. It will continue to auction R1.2 billion in inflation-linked bonds.
At the end of March, government also substantially reduced its bonds on auction.
In a statement, Treasury said that the preliminary numbers for the past year showed a "gross borrowing requirement that is lower than the revised budget".
This is thanks to tax collections being higher than expected. While the pandemic, as well as sales bans on alcohol and cigarettes, hit South Africa's tax income, large windfalls in mining royalties helped to bolster government income. In the end, SARS collected "only" 10% less in tax in the past year than in 2019 - against government's previous forecast that it would be 18% less.
The stronger-than-expected tax income means that while South Africa's debt has ballooned during the pandemic - gross borrowing increased from R433 billion to R670 billion, with a fifth of all tax income now paid to its creditors - government does not need to issue as many bonds as previously expected.
Bonds are in effect IOUs, which pay regular interest payments. The full amount is paid back after a specific number of years.
"Revenue numbers have been looking better than expected but we did not expect it this soon," says Nishan Maharaj, head of fixed interest investment at Coronation Fund Managers of the decision to reduce the bond size for the second time since end-March. "It is encouraging that Treasury is using any revenue overrun or underspending to reduce the borrowing requirement rather than spend more."
Given the solid interest rates offered by South African government bonds, there are usually strong demand for local bonds at the weekly auctions.
But recently, demand has been under pressure amid soaring yields on US government bonds - making local bonds less appealing.