South Africa reports record budget deficit

 ·30 Aug 2023

The rand dropped, underperforming most emerging-market peers, and yields on South African local-currency bonds rose after data showed the government ran a record budget deficit in July.

The rand weakened as much as 0.8% against the dollar after National Treasury figures showed that the budget moved to a deficit of R143.8 billion for the month, the largest since at least 2004 and wider than the R115.5 billion forecast by economists. There was a surplus of R36.7 billion in June.

Yields across the local-currency bond curve climbed, with rates on longer-dated securities rising more sharply. The yield on notes due December 2026 rose three basis points to 8.89%, while those on debt maturing in 2048 jumped nine basis points to 12.37%.

South Africa’s yield curve has been steepening as a slew of local risks fuel investor concerns that the government will have to ramp up bond issuance just as rising global yields draw capital away from emerging markets. Wednesday’s data is likely to compound these worries.

Speaking to lawmakers on Wednesday, South Africa’s central bank Governor Lesetja Kganyago said it was essential that the country reduced fiscal risks. In June, the bank expressed concern about a growing reluctance from local investors to continue absorbing government issuance.

Demand at Tuesday’s government bond auction was the lowest in nearly two years, based on data compiled by Bloomberg. Bidding was weakest for the longest-dated 2048 notes.

Sentiment was strained further on Wednesday by the National Treasury’s announcement that it would sell two long-dated bonds at next week’s auction, said Michelle Wohlberg, a fixed income analyst at Rand Merchant Bank. This had resulted in the yield curve bear-steepening, she said.

The rand was 0.5% lower at 18.5728 against the greenback by 1:02 p.m. in Johannesburg after weakening to 18.6235 earlier. 

Read: Every South African ‘owes’ R70,000 – thanks to the government

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