MTBPS: between a rock and a hard place

FX

The MTBPS will be tabled in parliament on Wednesday. For guidance as to the likely outcome, it is worth taking a look at recent comments made by SA’s new Finance Minister Nhlanhla Nene who faces his first big bi-annual budget event since his appointment. The market’s response to the outcome will likely to a large extent be determined by to how government is seen to deal with cyclical risks to revenues – that is, to what extent it seeks to limit associated slippage in fiscal metrics. Expenditure delays recently hinted at by the Minister might be viewed as positive, but the benefit would be diluted if they are back-loaded and/or involve delays concentrated in capital expenditure. There could be some guidance around government’s position as an employer through public sector wage negotiations heading towards the expiry of the multi-year public sector wage deal this fiscal year in estimates of the wage bill (and perhaps any details as to the split between increases in wages and employee numbers) and the size of the contingency reserve. The contingency reserve represents budgeted but unallocated spending, and could be seen to serve to some extent as a very loose proxy for the distance between the budgeted wage increase – as government’s opening salvo into negotiations – versus where government thinks it might be required to settle. Markets will also be on the lookout for any hints at tax regime changes under consideration heading towards the February 2015 Budget. New macroeconomic forecasts – especially economic growth forecasts – will be scrutinised to judge the believability of revenue and thus deficit targets. The more immediate impact of the MTBPS on the currency market will probably be via what it means for creditworthiness, and the probabilities surrounding the country’s debt ratings, especially in respect of the two agencies that have placed SA on negative outlook – namely, Moody’s and Fitch. Any guidance as to how government plans to deal with the hole in Eskom’s financing equation could impact the pricing of government and Eskom debt, both in absolute and relative terms. Care should be taken, when assessing possible currency market impacts, to judge what the outcome might mean for monetary policy – that is, whether it reduces or increases pressure on the SARB to raise interest rates (by reducing or increasing fiscal accommodation).

September CPI numbers will also be released on Wednesday, ahead of the MTBPS. Bloomberg consensus has the headline figure falling to 6.1% y/y from 6.4% y/y. The fall in the y/y figure is largely owing to a sharp drop in the petrol price; 57c/l this September compared to a meagre 5c/l decrease in September of last year. Base effects also offer something of a downdraft to the headline y/y number, with a 0.5% m/m increase recorded in September last year. SGBS economist Kim Silberman is a bit more optimistic than consensus; she expects that the headline measure to dip to 6.0%, perhaps as a result of a more sanguine view than consensus regarding food prices pressures. Core inflation is pegged at 5.7% y/y by Bloomberg consensus, a slight softening from 5.8% y/y in August. A softer inflation print, which would be interest-rate-friendly, could be rand-negative.

On the international data front, it is a quiet start to the week. There’s Eurozone current account data this morning, but Steve Barrow (our G10 FIC Strategist) thinks that it probably won’t have much market bearing. It’s for August, which seems pretty old now that we’re heading towards November. Nonetheless, Steve does note that it may be worth passing a glance over the data; not just the current account data, but the numbers relating to capital flows as well. When we add flows into and out of Eurozone bonds and equities (and FDI) to the current account, we arrive at a rough definition of the basic balance and there seems to be a reasonable relationship between this and euro/dollar. The basic balance is still in healthy surplus – at least on a 1-year rolling average basis. But the fact that the euro has dropped so much recently suggests that the capital flow data we will see in today’s release – and perhaps the next month or two – could show some deterioration.

The rand strengthened against the US dollar on Friday after three consecutive days of weakness, closing at USDZAR11.08 compared with Thursday’s close of USDZAR11.12. Rand strength against the greenback occurred into a mixed performance from the dollar against the major crosses. It contradicted general weakness across commodity currencies (the rand was the only commodity currency among those we cover for purposes of this report that saw appreciation on the day) but was consistent with signs of a rise in global risk appetite and a strong performance across most EM currencies. The dollar strengthened against the euro and the yen, while weakening against the pound. The rand strengthened against all of the major crosses, with the biggest move seen against the yen (0.9%). All but one of the EM currencies we monitor for the purposes of this report appreciated. The exception was the THB. The rand was the best-performing commodity currency and occupied a middle- to lower position in the EM currency category (beating the MXN, HUF and THB). The rand traded between a low of USDZAR11.0600 and a high of USDZAR11.1395 intraday. Support from where the rand opened this morning sits at 11.0400, 10.9500, 10.9200 and 10.8000, 10.7500. Resistance levels sit at 11.1650, 11.2450, 11.3100, 11.3550 and 11.4000.

Commodity price moves were mostly stronger. Brent, copper and platinum rose by 2.0%, 1.3% and 1.1% respectively. Gold meanwhile fell marginally by 0.04%. The developed market MSCI rose by 1.3%, the EM MSCI by 0.6% and ALSI rose by 2.0%. The EMBI spread compressed by 13 bps and SA’s 5yr CDS spread compressed by 12 bps. The CBOE VIX index, a volatility based proxy for global risk appetite/aversion, fell by 12.7%.

Non-residents were mild net sellers of local equities (-ZAR309 million) and were aggressive net sellers of local bonds (-ZAR2 101 million) on the day. Selling of bonds was spread across the 12+ (-ZAR1 397 million), 3-7 (-ZAR355 million), 1-3 (-ZAR312 million) and 7-12 (-ZAR36 million) year segments. Bond yields were mostly steady on the day, with exception of the R214, which rose by 1 bp. According to Bloomberg, the 3x6, 6x9 and 12x15 FRAs were unchanged.

FI

We have both inflation and MTBPS this week. Bloomberg consensus is for September inflation to decrease to +6.1% y/y, from the prior month’s +6.4 y/y. The move in the oil price in rand terms in October means that we could see some fairly substantial downward pressure on inflation in Q4. On Friday, we published our SA FI Weekly “MTBPS next week”. We believe that the hints of possible intent to delay some expenditure items would be bond-market-positive. We do not expect to see any change to the sizes of government auctions, but believe that the amount to be borrowed will be increased, taking advantage of issuance currently behind ahead of 2013/14 figures.

Friday saw low turnover, with just ZAR12.6bn traded in nominal SAGBs and ZAR2.0bn in ILBs. However, it was another day of large foreign selling, with slightly over ZAR2.0bn sold. 64.3% of turnover came from the R186, 8.6% from the R213, these being the two bonds that were heavily sold by offshore. There was little change to bond yields, with marginal weakness in the very back-end of the curve, where the R209, R2037, R214 and R2048 moved 1 bp higher. FRAs were unchanged on the day. On the week though, FRAs were substantially lower and the nominal curve steepened. US Treasuries sold off on Friday. At the short-end, the 2yr UST rose by 2.76 bps to a yield of 0.37% and the yield on the 5yr UST rose by 3.52 bps to 1.42%. At the longer-end, the 10yr note rose by 3.77 bps to a yield of 2.19% and the yield on the 30yr note rose by 3.25 bps to 2.98%. This morning, Treasuries are trading at slightly weaker levels.

Non-residents were significant net sellers of nominal SAGBs on Friday for a total of -ZAR2.10bn, following net selling of -ZAR2.25bn on Thursday. This follows a prior five consecutive trading days of net foreign buying. Net selling on Friday was recorded across all segments of the curve, with the 12+ year segment recording the largest outflows, totaling -ZAR1.40bn. This was mainly due to selling recorded in the R186 (-ZAR1.13bn) and the R213 (-ZAR556m); these outflows were partially offset by net buying recorded in the R209 (+ZAR194m) and the R214 (+ZAR103m). Foreigners sold -ZAR355m in the 3-7 year maturity category due to outflows recorded in the R207 (-ZAR334m). -ZAR312m was sold in the 1-3 year segment, due to net selling recorded in the R159 of -ZAR364m on Friday.

Friday’s ILB auction of the R212, I2025 and I2038 saw a decline from the previous week’s auction, while the bonds recorded mixed pricing. Total bids declined to ZAR1.93bn from ZAR2.04bn at the previous week’s auction. The full ZAR800m was raised, for a bid/cover ratio of 2.4x; this compares to a cover ratio of 2.6x at the prior offering. Market participation declined to 24 on Friday, from 30 participants at the previous offering. The I2038 attracted the greatest investor interest, with 42% of the auction’s bids going to the bond. This was followed by the R212, which attracted 32% of the auction’s bids, and the I2025, which received the remaining 26% of bids. Auction pricing was slightly mixed, with the I2038 clearing 1.00 bp higher than its MTM closing level from Thursday, while the R212 and the I2025 both cleared in line with their respective closing yields. The I2038 cleared at a yield of 1.84%, the R212 cleared at 1.55% and the I2025 priced at 1.74%.

On Friday, Russia was downgraded on notch by Moody’s to Baa2, with the outlook still negative. The two key drivers for the downgrade were “Russia’s increasingly subdued medium-term growth prospects” and “the gradual, but ongoing erosion of the country’s foreign-exchange buffers due to capital flight, Russia borrower’ restricted international market access and low oil prices”. Moody’s previously rated Russia the same as South Africa. We recently published commentary on the Moody’s rating of South Africa in our SA FI Weekly “Moody’s still to act on SA”, 10 October. Moody’s rates South Africa Baa1 and has had a negative outlook for the past 2 years.

EM FI and currency markets rallied on average on Friday, in contrast to the overall selloff recorded in US Treasuries. In the FI space, 5yr local currency sovereign yields fell by 5.28 bps on average and 10yr yields fell by 6.79 bps on average. SA’s FI market recorded a poor performance against its EM peers, with the 5yr and 10yr notes selling off on the day (albeit marginally), as well as both underperforming relative to the respective EM averages. SA’s 5yr yield rose by 0.40 of a bp behind weaker moves recorded in Mexico (+6.20 bps) and India (+1.80 bps). SA’s 10yr yield rose by 0.20 of a bp behind weaker moves recorded in the same two countries, Mexico (+4.70 bps) and India (+1.90 bps). In contrast, the remaining EMs we monitor strengthened. The moves stronger were led by Turkey, with the 5yr note declining by 25.00 bps, followed by strong moves in Indonesia (-8.60 bps) and Russia (-7.42 bps). Turkey’s 10yr note declined by 21.00 bps, followed by Brazil (-17.90 bps) and Indonesia (-12.40 bps).

EM currencies appreciated on balance on the day, with the Brazilian real leading the moves stronger. The real appreciated by a substantial 1.51% on Friday, followed by the Indonesian rupiah, which appreciated by 1.22%. Other currencies to appreciate on the day were the Turkish lira (0.72%), Indian rupee (0.65%), Russian ruble (0.53%), SA rand (0.33%), Mexican peso (0.27%) and Hungarian forint (0.15%). In contrast, the Polish zloty depreciated by 0.12%, while the Thai baht depreciated by a marginal 0.03% on the day.

Latest SA publications

Fixed Income Weekly: MTBPS week by Asher Lipson and Kuvasha Naidoo (17 October 2014)

Credit & Securitisation Weekly: Pick n Pay reports H1:15 results by Robyn MacLennan and Steffen Kriel (17 October 2014)

Credit & Securitisation Flash Note: Calgro M3 Holdings Ltd by Robyn MacLennan and Steffen Kriel (14 October 2014)

Fixed Income Weekly: Moody's still to act on SA by Asher Lipson and Kuvasha Naidoo (10 October 2014)

Fixed Income ALBI note: November ALBI reweighting; R2032 joins the index by Asher Lipson and Kuvasha Naidoo (10 October 2014)

Credit & Securitisation Weekly: S&P comments on Eskom package by Robyn MacLennan and Steffen Kriel (10 October 2014)

Fixed Income Trade Idea: Receive 3x6, 5x8 FRAs by Asher Lipson and Kuvasha Naidoo (8 October 2014)

South Africa: Credit: SA property sector: Challenging environment ahead for office and industrial sectors by Robyn MacLennan and Steffen Kriel (8 October 2014)

SA FX Weekly: Asymmetric risk by Marc Ground, Bruce Donald and Varushka Singh (6 October 2014)

Credit & Securitisation Monthly: Quarterly update – Q3 2014 by Robyn MacLennan and Steffen Kriel (3 October 2014)

Fixed Income Weekly: Revenue slightly behind, issuance well ahead by Asher Lipson and Kuvasha Naidoo (3 October 2014)