A report revealing the logic of SA’s debt
Treasury publication spells out how and where the country borrows from, what the costs are and how these are affected by changed conditions
One of the National Treasury’s lesser-known publications is its annual Debt Management Report, a treasure trove of information on every instrument the government uses to borrow on the market and how its price has trended, as well as on the Treasury’s strategy to keep the costs of borrowing down and mitigate risks to the public finances and to SA’s economy.
The report details the way in which the financial position of the state-owned enterprises affects the national budget as well, given the hundreds of billions of rand worth of guarantees the government has issued, particularly to entities such as Eskom and South African Airways, and the risk that those guarantees could get called on.
The level of debt, the length of time before it needs to be repaid (matures), whether the debt is local or foreign and who owns it are among the crucial issues that investors and ratings agencies track to assess whether the debt level is sustainable and affordable.
From the early days of democracy until the global financial crisis in 2008-09, reforms to SA’s public finances and to the management of its public debt were crucial to cutting the government’s cost of debt and its interest bill, so freeing up resources that the government could redeploy
to finance a huge expansion in social spending on education, health, social grants and the like, as well as on public infrastructure.
But since the financial crisis, the debt level, and the cost
of servicing that debt, has risen steeply as the govern-ment sought to maintain spending levels while economic growth rates and revenue collections tanked.
That has seen the ratio of debt to GDP double since the crisis, and October’s medium-term budget policy statement projected that the net debt ratio would peak, at almost 48%, only in 2019-20, with the state debt cost the fastest rising item of government expenditure.
The chapter of the Debt Management Report on which investors hold SA’s government debt, and where, highlights some of the reasons ratings by the major international credit rating agencies — Moody’s, S&P Global and Fitch — matter
so much and why the government and South Africans generally need to heed the agencies’ concerns.
Foreign debt, in foreign currency, is quite a low percentage of total government debt, so SA is relatively well protected from wild gyrations in its exchange rate and the effect that could have on the cost of government debt.
But since the crisis, foreign investors bought heavily into the local currency debt that the government issues on the domestic market.
Foreign investors increased their holdings of government bonds from 21.8% in 2010 to 34% in March 2016, and they are particularly large holders of fixed rate bonds (as opposed to,
for example, inflation-linked bonds). Pension funds are the next largest holders of government debt, with 29.9% in March 2016, down from 36.5% in 2010, and the ratings obviously matter to them and their beneficiaries too.
The investment grade granted to SA bonds is particularly crucial for many pension and provident funds, and other institutional investors both local and foreign, who have mandates limiting them to invest in investment-grade assets only – and who would have to sell in the event of a downgrade to junk status.
That lends particular weight to what the ratings agencies say about fiscal policy and the government’s debt trajectory and whether they consider it sustainable, as well as how they see the risks.
S&P, in a "frequently asked questions" document it published in January, commented: "We believe that a combination of net general government debt to GDP, plus exposures to non-financial public enterprises with weak balance sheets exceeding 60% of GDP, would weaken our view of fiscal flexibility."
It said SA’s fiscal space, in other words the flexibility the government has to increase its spending to boost the economy, "is now limited" following the expansionary post-2009 fiscal stance that resulted in fiscal deficits averaging 4%, with net debt to GDP rising to 48% in 2017 from 30%.
The government has committed itself to a fiscal consolidation path and S&P believes it will stay on it — but the biggest risk is from Eskom Holdings, "as it benefits from a government guarantee framework of R350bn or about 9% of 2016 GDP", says S&P, urging governance and financial reforms at state-owned enterprises.
Moody’s published an in-depth report in November 2016, which focused on fiscal consolidation and SA’s public debt trajectory.
It gave the government credit for consistently meeting expenditure ceilings and said it was close to bringing the primary fiscal balance into surplus.
However, the debt-to-GDP ratio continued to rise due to low growth, revenue shortfalls and, in some years, rand depreciation. "Low growth is a major debt driver given that it reduces the tax bases and nominal revenue, and inflates deficits and debt ratios relative to GDP," the Moody’s report said.
The debt burden reached 49.4% in 2015, nearly double the 26.5% of 2008.
Moody’s estimates that if GDP had grown by even 2.5% a year in 2012-2015, the debt-to-GDP ratio would be at least five percentage points of GDP lower in 2015.
Moody’s said SA’s key debt indicators were close to
the median for emerging market peers, but compared to countries such as Poland or Malaysia, "who share similar fiscal strength assessments, SA’s debt has so far not stabilised despite similarly sized deficits".