South African bonds to tick higher

There are still bargains to be found in South African government bonds, which have cheapened on the back of large amounts of new paper but late-comers, especially in the second half of 2010, might be disappointed. Bond yields, which move inversely to prices, climbed sharply in 2009 as a recession in Africa's biggest economy led to higher government spending at a time when revenue was falling, necessitating extra borrowing.
South Africa exited the recession in the third quarter but not before about a million jobs were lost. Due to the recession tax revenue will undershoot the target by about 70 billion rand ($9.43 billion) and the fiscal deficit for 2009/10 will likely widen to a record 7.6 percent of GDP.
But analysts think the National Treasury will announce a wider gap during its budget announcement on February 17, putting pressure on bond prices. Government's public sector borrowing requirement widened to 11.8 percent of GDP in 2009/10 or 284.5 billion rand and is expected to narrow to 11.2 percent in 2010/11 and 8.4 percent by 2012/13.
The National Treasury also went abroad for a $1.5 billion 2019 bond in May and reopened it for an additional $500 million in August. It is expected to follow up that issuance with a similar one this year after oversubscription last year. At its weekly debt auctions, government steadily increased the amount it offers to over 2 billion rand a week, from 800 million previously, to plug the fiscal gap.
Despite larger issuances, investors' demand has been steady and could even pick up in the first half as bargain-hunters come looking. Last year, foreigners bought 24 billion rand worth of South African bonds after selling 16 billion rand worth of local debt in 2008.
This year's first auction on January 12 was fairly well-covered but some players were still waiting on the sidelines for details of the budget, said Nicholas Kennedy, emerging market analyst at 4CAST. Government has said it would not over-borrow but state-owned companies have lined up for funding, putting pressure on the coffers. Finances could start improving in the second half of the year as tax revenue improves along with the recovering economy, which could help bond prices.