Gov’t misses debt target again

Mbongeni Mguni | Monday May 5, 2025 06:00

Figures from the central bank show that bidders for the government treasury bills and bonds on offer at the April 24 auction, were particularly reluctant to take up notes at the longer end of the spectrum, potentially signalling some concerns about future economic trends.

Government is counting on its domestic debt programme to primarily support the forecast P22.1 billion deficit for the 2025–2026 financial year, with external loans playing a smaller role.

However, bidders at the monthly auctions of the government notes have increasingly pressed for higher returns for the funds they are lending government, resulting in the BoB missing the debt targets consistently since July last year.

Besides the presence of South Africa as a close-by competitor for returns with the BoB, yields have also been pushed up by structural liquidity in the capital market, which intensified beginning in the second half of last year.

Central bank officials said the liquidity crunch was due to lower diamond revenues, which in turn have restrained government spending, resulting in higher competition for the available capital in the market.

“Liquidity levels declined substantially from the third quarter of 2024, resulting in yields pickup and a divergence between the T-Bill rates and the Monetary Policy Rate,” the BoB said this week in a monetary policy report for April. “The government securities market remains with upward pressure on yields, as shown by the low uptake of government securities at primary auctions.”

Under government’s domestic note issuance programme, the BoB floats bonds and Treasury Bills each month to raise debt for government in the capital market. The programme’s ceiling was raised to P55 billion early last year after the previous P30 billion cap was reached due to more aggressive borrowing caused by stubborn budget deficits and pandemic spending.

At the auctions, primary dealers, who are exclusively banks, compete to lend to the government by offering the yields or returns they are seeking. The BoB decides the yield or the 'interest' level it is willing to pay the dealers on the particular securities on offer.

Kgori Capital trend analysis shows that at the last auction, yields increased across all the notes on offer, rising in one instance by as much as 45 basis points.

“All the bonds and T-bills on offer were under allotted during the auction. This was more prevalent at the long end of the curve. “Bond stop-out yields increased across all tenures, more especially at the belly of the curve,” the investment management firm said.

BoB data shows that yields have been climbing significantly in recent auctions, with the highest bid received for the market’s second-longest maturing bond climbing from 10.25% at the March auction to 18% at the April auction. The actual yield accepted by the BoB for the bond rose from 10.25% at the March auction to 10.325% at the April auction.

For government, the higher yields demanded by the market mean steeper borrowing costs in a year in which the deficit could widen as the recovery in the diamond downturn is yet to firm.

The recent downgrades of the country’s outlook by S&P as well as Moody’s is expected to further fuel demands for higher yields by the market. Both agencies, however, affirmed their high assessment of the country’s sovereign credit rating.