Experts see funding famine

Cape Town - The government's funding requirements for the next three years' infrastructure expenditure could be R200bn too rich for local investors.

That the money will probably have to be sought overseas because of the domestic capital market's inability to satisfy these requirements was the view expressed at a local capital market conference.

Sylvia Chahonyo, manager for debt capital markets at Standard Bank, says it will be a question of supply and demand if one looks at government's financing needs compared to the growth rates of investment institutions such as pension funds.

"In the next three years there will probably be a R200bn excess in terms of funding sought in the debt capital markets for infrastructure, municipalities and state institutions," she reckons. "Government will be forced to look elsewhere for finance - probably overseas."

Jeff Gable, head of research at Absa Capital, referred to the "staggering increase" in new loan requirements over the year from the previous medium-term expenditure framework to the recent one.

He points to the difference of almost R400bn between the funding needs announced in the latest medium-term expenditure framework and that previously announced for government departments for the current financial year (2010) and the next two years (2011 and 2012).

"This is what issuers [of debt instruments] will have to compete with in the private sector."

Gable said the total funding needs of the public sector (which includes the provinces, municipalities and state institutions) have increased from last year's projected R250bn to R850bn over the three years. "This is an unprecedented issue to hit the market," he said.

Other participants at the conference confirmed that the local stock market would probably become saturated with government bonds as a result of government's needs.

Senior JSE strategist Monica Ambrosi declared that there was uncertainty as to the extent to which the market could take up government and state institution debt instruments issued over the next two fiscal years, given the size of the funding required that the Minister of Finance had announced.

"It is possible that there will be a degree of saturation," she said.

John Paterson from Investec Capital Markets also believed that the most likely scenario would be saturation of the capital market as far as government is concerned.

He said this would impact other debt instruments. "The spending that is envisaged, the scope and time frame of the enormous number of projects - from water to electricity to roads - will have a significant effect on the development and come-back of the securitisation market."

- Sake24.com

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