By Annabel Bishop
JOHANNESBURG - South Africa’s Medium-Term Budget Policy Statement (MTBPS), now due on Wednesday, will likely continue to show very weak government finances, with high projections on debt and severely elevated debt and deficit (both as percent of gross domestic product (GDP)) ratios for 2020/21.
South Africa’s public finances are unsustainable, with the latest update showing a debt peak of 87.4percent of GDP.
The supply of government debt is ballooning and bond yields have lifted noticeably in response, the yield curve has steepened substantially as the perceived ability of South Africa to repay the debt it has borrowed falls as the sheer quantum of debt rises, reducing its creditworthiness and so credit ratings.
Rapidly rising borrowing costs make the borrowing trajectory unsustainable, while also eating up more and more of the budget, reducing its allocations to other areas at least on a percent of total allocation basis, but also in rand billions if the budget is not to become very unsustainable and lead to fiscal collapse.
South Africa’s rising credit risk, reflective of increased investor concerns of a possible eventual debt default, is resulting in reduced foreign interest, with yields rising (prices falling) as supply balloons.
After seeing a spike in bond yields in the second half of March, and a substantial widening in the differentials between South Africa’s longer and shorter dated fixed income securities, there has been only partial pull back as the deteriorated fiscal metrics worry investors.
The long slow burn through South Africa’s fiscal strength via corruption, inefficiencies and wastages, poor fiscal choices and destruction of structures and technocracies of the past decade, has caused the country to face a fiscal cliff and increased chance of default as credit risk rises.
Concerns are circulating in the markets of a revised peaking in South Africa’s gross debt-to-GDP ratio of 100percent, instead of the previous 87.4percent.
But a debt to GDP peak of 100percent instead of 87.4percent is unlikely to be less harmful to the economy, and will instead be more likely to be more harmful, with a negative impact on the country’s credit ratings and market sentiment and borrowing costs, crowding out private sector investment and growth.
Rapidly rising borrowing costs make the borrowing trajectory unsustainable, and eat up more of the budget, reducing allocations to other areas on a percent of total allocation basis, if the budget is not to become very unsustainable and lead to fiscal collapse.
Failure to be able to pay its interest or servicing costs will loom on the horizon for South Africa if it continues to raise its debt projections, which have deteriorated over the past 10years. Foreigners are substantial disinvestors from South Africa’s bond markets, and this has been the case for quite a while for South Africa’s equity markets, with credit rating downgrades decreasing the likelihood of stronger economic growth.
With South Afria already at risk of single notch credit rating downgrades from Moody’s, Fitch and S&P after the MTBPS, double notch downgrades may occur if the MTBPS abandons the active debt scenario of a peak of 87percent of GDP and moves to one of a 100percent of GDP, or worse. Substantial rand weakness would ensue, and higher borrowing costs (higher bond yields), which in turn make the ability to repay debt much more difficult, and so also in investors’ eyes more unlikely, in turn sparking further disinvestment as creditworthiness reduces even further.
While the Economic Reconstruction and Recovery Plan will likely be viewed positively by the credit rating agencies, they too have been repeatedly disappointed by insufficient delivery, and plans on their own are insufficient to change the perceived creditworthiness of South Africa. The country has been more consistent in raising and achieving its higher debt projections, and then exceeding these expectations, than it has been in achieving planned higher growth, revenue collection or substantially reducing unemployment in the past decade.
South Africa needs to urgently cut its state expenditure sustainably, and reduce the planned peaking of its debt below 87percent not lift it to 100percent of GDP.
Annabel Bishop is the chief economist at Investec.
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