Briefs.png

To what extent can increased sale of government bonds fund the shortfall in revenue or relief associated with the COVID-19 epidemic?

This brief explores the possibility of allocating to buyers the full amount of short-term, lower-yielding government bonds for which they bid, the impact on the average yield to maturity, and how the availability of this funding option varies with circumstances.
To what extent can increased sale of government bonds fund the shortfall in revenue or relief associated with the COVID-19 epidemic?

Introduction

Before a national disaster and lockdowns were declared in South Africa the fiscus was already in poor shape. Nonetheless, to try and ease the effects of lockdown the government has announced R500 billion in additional spending. This amounts to 10% of GDP, comparable to what the US has spent on its relief efforts. The stimulus has been more than 30% of GDP in both Italy and Germany.

When reporters asked South Africa’s Treasury officials if the R500 billion fund raising and distribution efforts would be enough, they were reluctant to provide details on the subject or on the wider implications for the fiscus, until an adjusted budget is announced. Whether there will be an adjusted budget in the short term, or whether a budget adjustment will be introduced with the October Medium Term Budget Policy Statement is unclear.

The options

With a budget deficit expected to widen to more than 10% of GDP, government will need to consider a number of proposals to help the country’s economy and its citizens. Among them are: bilateral loans from other countries, an additional loan facility from the IMF or the route the apartheid government took of prescribed assets. It is doubtful that any or all of these will be of the scale required to finance the government continuously for the next 12 months. The main source of funding is likely still to be weekly bond auctions.[1]

Increased funding from a full allocation of Treasury bonds and bills at weekly auctions

Using the available information from the South African Reserve Bank’s bond and bill auctions during the two months preceding the lockdown, February and March, this brief is designed to answer the question: how much more funding could have been raised by a full allocation to bidders and at what interest rates?

The results of our study are shown in the tables below:

Vanilla Bonds Auctions

Auction Date

Bond

Weighted Average Yield

Allocated Rm

Bids Rm

Additional Rm

New Yield %

Premium %

Bid/ Allocation

11/02/2020

R2030

8.835

1,510

6,110

4,600

8.8595

0.0245

 
 

R2035

9.720

1,510

3,670

2,160

9.7509

0.0309

 
 

R2048

10.150

1,510

4,425

2,915

10.1829

0.0329

3.14

18/02/2020

R2030

8.920

1,510

2,780

1,270

8.9406

0.0206

 
 

R2032

9.320

1,510

3,875

2,365

9.3551

0.0351

 
 

R2044

10.180

1,510

3,800

2,290

10.2162

0.0362

2.31

25 /02/2020

R186

7.860

1,510

4,470

2,960

7.8732

0.0132

 
 

R2030

8.780

1,510

5,795

4,285

8.8244

0.0444

 
 

R2037

9.770

1,510

5,760

4,250

9.8180

0.0480

3.54

03/03/2020

R2030

9.105

1,510

5,425

3,915

9.4965

0.3915

 
 

R2037

10.105

1,510

4,285

2,775

10.1520

0.0470

 
 

R2048

10.250

1,510

4,790

3,280

10.3356

0.0856

3.20

17/03/2020

R186

9.420

1,510

3,235

1,725

9.5480

0.1280

 
 

R2032

10.240

1,510

2,920

1,410

10.6287

0.3887

 
 

R2048

11.740

1,510

3,125

1,615

12.0010

0.2610

2.05

24/03/2020

R186

12.000

1,510

3,115

1,605

     
 

R2030

13.400

1,510

2,760

1,250

     
 

R2037

14.100

1,510

4,320

2,810

   

2.25

31/03/2020

R2023

7.170

1,510

4,930

3,420

7.4856

0.3156

 
 

R186

10.230

1,510

7,550

6,040

10.3540

0.1240

 
 

R2030

11.370

1,510

6,715

5,205

11.6142

0.2442

4.24

 Total

   

31,710

93,855

62,145

     

Inflation Linked Bond Auctions 

Auction Date

Bond

Weighted Average Yield %

Allocated Rm

Bids Rm

Additional Rm

New Yield %

Premium %

Bid/ Allocation

7/02/2020

I2025

3.560

500

2,235

1,735

3.6842

0.1242

 
 

I2033

 

235

435

200

     
 

I2046

3.930

305

1,120

815

3.9373

0.0073

3.64

14/02/2020

I2025

3.465

450

1,540

1,090

3.5092

0.0442

 
 

I2038

3.910

350

685

335

3.9173

0.0073

 
 

I2050

3.920

240

675

435

3.9297

0.0097

2.79

21/02/2020

I2029

3.665

130

1,130

1,000

3.7026

0.0376

 
 

I2033

3.860

570

1,660

1,090

3.8731

0.0131

 
 

I2046

3.870

340

725

385

3.8833

0.0133

3.38

28/02/2020

I2025

3.480

15

915

900

3.5685

0.0885

 
 

I2038

3.900

245

300

55

3.9009

0.0009

 
 

I2046

3.930

780

1,210

430

3.9424

0.0124

2.33

06/03/2020

I2029

3.810

220

320

100

3.8163

0.0063

 
 

I2033

3.920

335

335

0

3.9200

0.0000

 
 

I2050

3.980

220

230

10

3.9815

0.0015

1.14

13/03/2020

I2025

4.050

355

720

365

4.0830

0.0330

 
 

I2033

4.350

80

215

135

4.3657

0.0157

 
 

I2050

4.550

605

740

135

4.5546

0.0046

1.61

20/03/2020

R212

3.600

175

375

200

3.8133

0.2133

 
 

I2038

6.550

140

225

85

6.6350

0.0850

 
 

I2050

6.390

430

665

235

6.5685

0.1785

1.70

 Total

   

6,720

16,455

9,735

     

Treasury Bills

During February and March, all bids were fully allocated for the 91 day and 182 day Treasury Bills. This was not the case for 273 day and 365 day Bills as the table below indicates:

Date

273 day Bills

 

365 day Bills

 
 

Bids Rm

Allocated Rm

Additional Rm

Yield

Bids Rm

Allocated Rm

Additional Rm

Yield

7/02/2020

7190

2370

4820

6.89

11110

2505

8605

6.88

14/02/2020

7488

2370

5118

6.84

7035

2505

4530

6.85

21/02/2020

7178

3819

3359

6.79

10010

2505

7505

6.78

28/02/2020

5869

2370

3499

6.54

7904

2505

5399

6.68

06/03/2020

7424

2370

5054

6.43

4817

2505

2312

6.60

13/03/2020

4898

2370

2528

6.41

3205

2505

700

6.69

20/03/2020

5550

2370

3180

5.94

3300

2505

795

6.28

27/03/2020

5692

3510

2182

5.87

3900

3546

354

6.25

Total

   

29740

     

30200

 

To calculate how much more funding could have been raised by a full allocation to bidders for short-term bonds, we subtracted the amount of bonds that were allocated at each auction from the amounts that were bid for by buyers. This gave a total of R 71.88 billion that could have been raised (R 62,145m + R 9,735m) in these auctions over February and March, an average of R 36 billion per month.

The additional R 71.88 billion, however, would have encountered higher interest rates, as shown by the ‘Premium %’ column above (New Yield % minus Weighted Average Yield %).[2] In addition, the bid/allocation ratios also change according to circumstances. As the liquidity situation became more difficult over February and March, the premium became greater and the bid/allocation ratios smaller, meaning less potential funding at a higher cost. The Reserve Bank has stated that it will intervene when there is a lack of liquidity, and this policy will render crunch periods brief.

Additional funding of R 59.94 billion (R 29,740 m + R30.200m) could have been raised from sale of longer dated Treasury bills, an average of R 30 billion per month.

These estimates are likely to be over-estimates for two reasons. The first is that greater success of bidders in one week may lead to reduced demand in the next. The second is that, were it known that most or all bids would be taken up regularly, more aggressive bidding may emerge, raising yields, possibly to an unacceptable level.

Given a sharply rising yield curve, it is markedly cheaper to raise funds from bills and short-term bonds. However, this strategy would shorten the average maturity of government debt and require more frequent rollovers. Shorter average maturity implies greater vulnerability.

Conclusion

The South African government will have to raise more funds to try and alleviate the effects of the COVD-19 pandemic. One of the possible sources for these funds is the domestic capital market through an increased sale of government bonds and bills.

However, unless confidence in this market is restored via much needed structural reforms to the economy generally and movements towards re-attaining investment grade ratings by the agencies, funding will be expensive, adding stress to the fiscal position.

Charles Collocott
Policy Researcher
charles.c@hsf.org.za


[2]The New Yield % is the weighted average of (a) the reported average yield and the (b) average of the highest bid yield and the reported average yield.