Government debt surpasses already dire estimates

The state’s debt levels have already surpassed the revised estimates outlined in finance minister Tito Mboweni’s bleak medium-term budget policy statement (MTBPS), data from the SA Reserve Bank revealed on Friday.

According to the Bank’s latest quarterly bulletin the state’s gross loan debt for the 2019/2020 fiscal year reached 61.5% of GDP by the end of September, already overshooting the sharp upward revisions made by Mboweni in the MTBPS.  

Mboweni’s dismal adjustments budget — where he revised the forecasts for the government’s debt to GDP ratio from 56.2% for the current 2019/2020 year to 60.8% — prompted ratings agency Moody’s Investors Services to revise SA’s credit outlook to negative from stable.

Moody’s, the last agency to rate SA’s debt at investment grade, was followed by its peer S&P Global Ratings who also changed its outlook to negative. Both agencies warned that the government needed to rein in its debt levels and reduce its spending — including on the public sector wage bill — or face a downgrade.

The Bank said in its quarterly bulletin on Friday: “National government’s total gross loans debt increased significantly from 56% of GDP as at September 2018 to 61.5% of GDP a year later, already surpassing the upwardly revised estimate of 60.8% for the end of the fiscal 2019/2020 in the 2019 MTBPS”.

The increases have been driven by higher borrowing requirements in the first half of the year as spending growth increased dramatically. According to the Bank’s data expenditure growth was 12.2% higher year on year compared with a rate of 4.5% a year ago.

Higher government spending resulted mainly from increased transfers and subsidies, higher debt-service costs as well as the additional allocations to state-owned companies, the Bank noted.

The state is also contending with revenue shortfalls driven by increased VAT refunds, weaker domestic growth and weaker provisional tax payments.

Since Mboweni delivered the MTBPS, economic growth has contracted 0.6% in the third quarter of 2019. Business and consumer confidence remain moribund and, according to the Bank’s data, SA is stuck in the longest downward business cycle since the end of World War 2.

With the advent of load-shedding from Eskom, which has entered its second week, fear is growing that the economy will slip into a recession.

Mboweni also revised the state’s consolidated budget deficit sharply upwards from 4.5% for 2019/2020 to 5.9%. It is expected to rise even further in the coming three years reaching 6.5% in 2020/2021 and 5.9% in 2022/2023.

“Robust and consistently tight fiscal measures are required to stabilise the budget deficit at a more sustainable level,” the Bank said in the review.

In a bid to reduce government spending by R150bn over the coming three years, Mboweni committed the government to reducing the state wage bill as part of these efforts. But the proposal has been criticised by public sector labour unions.

Nevertheless, the Bank stressed that any increases negotiated in the next round of wage talks should be in line with inflation.

“With the compensation of employees accounting for 34.2% of total government expenditure ... growth in compensation should preferably not be above inflation, as in the past,” the Bank said.