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South Africa faces mounting debt as the ravages of the coronavirus pandemic exacerbate a deterioration in public finances caused by overspending, mismanagement and alleged corruption during the nine-year rule of former President Jacob Zuma.
After cutting borrowing during years of strong economic growth since the late 1990s, the government posted its first post-apartheid budget surplus in 2007.
However, Finance Minister Tito Mboweni’s medium-term budget will show on Wednesday that debt levels are much higher than in 1994, when the ruling African National Congress took control of a near bankrupt state.
While the rand is near its best since March and bond yields have recovered from a blowout when the virus lockdown began, the generic 10-year yield remains above 9%, suggesting that a risk premium is still priced on the country’s debt.
These charts showing how South Africa has failed to contain liabilities since the impact of the global financial crisis:
Even before the virus, increased spending to grow the government workforce and bail out state-owned companies such as Eskom Holdings SOC Ltd. conspired with below-target revenue and sluggish economic growth to boost debt. As a percentage of gross domestic product, it will peak in 2024 in the Treasury’s best-case scenario.
That is as long as the government takes active steps to stabilize the trajectory and revive the economy.
“South Africa’s debt position will be unsustainable for the next five years because fiscal consolidation measures are unworkable,” said Mpho Molopyane, economist at Rand Merchant Bank of FirstRand Group Ltd. “The Treasury will not be in a position to deliver.”
South Africa’s debt service costs likely increased to 4% of GDP in 2019-20, the highest since 2003, and will rise further. The cost of servicing loans has been the fastest growing spending item since 2011 and is displacing money for development, including education and health.
The virus forced the ruling party to break its long-standing resistance to loans from the International Monetary Fund, obtaining an emergency loan of $ 4.3 billion to fund part of a stimulus package announced by President Cyril Ramaphosa.
The Treasury can introduce a debt limit in the budget, a suggestion proposed by the IMF almost two years ago.
Talks with the World Bank may come to a standstill after the government rejected initial conditions tied to the funds it seeks to borrow.
South Africa could exceed its domestic financing requirements for the year after issuing debt at an “alarming rate” to finance the budget deficit, said Mike van der Westhuizen, portfolio manager at Citadel Investment Services. The strong uptake of long-term domestic loans is largely due to the Treasury doubling the limit on non-competitive auctions to 100%, he said.
That could give the Treasury the option to slow down the pace of domestic bond sales for the remainder of the fiscal year, or continue at the same pace to cover a possible larger-than-expected revenue shortfall.
Yields on the country’s 10-year generic rand-denominated debt have risen since 2012, when South Africa began its march toward a house full of junk credit ratings.
It lost its last investment grade assessment at Moody’s Investors Service in March, more than 25 years after its first award. The cuts increased borrowing costs and complicated efforts to narrow the budget gap.
South Africa’s low level of foreign currency debt is seen as a strength because it makes the country less vulnerable to rand weakness and could make it easier for the government to refinance maturing debt, according to Elina Ribakova, deputy chief economist at the Institute of International finances. It could make the road to a debt crisis similar to Argentina or Greece slower and longer.
What the Bloomberg economist says
“The National Treasury has been making bold promises to restore public finances since 2017, only to kick the road later. This reflects the difficulty of controlling the wage bill and reducing transfers to state enterprises. Given the limited options available to implement the planned consolidation plan, this time will likely be no different. “
Read: South Africa’s Largest Bank Warns of Increased Spending Cut Requests
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