Is SA borrowing from Peter to pay Paul?
Tito Mboweni needs to pay particular attention to strategies to reduce the cost of debt and the quantum of debt relative to GDP
Reading the financial media last week one could be forgiven for thinking SA’s fiscal problems were a thing of the past, with headlines such as “Why Treasury is suddenly swimming in cash” and “Surprise: Govt to earn R100bn more than expected in tax”.
Yes, it is true that tax revenues surprised to the upside, but that is not the whole story. Here is another fact: in the first 275 days of the fiscal year, the government overspent by R433bn, or R1.57bn a day. When the government spends more than it raises in taxes it borrows the difference from the capital markets.
In reality, government borrowings in any particular year are larger than just the budgeted difference between revenue and expenditure on goods and services. That is because, among other things, the government borrows money to pay interest on previous debt. It would not be prudent for one to draw on one credit card to pay the minimum payment due on another, yet this is the situation SA finds itself in.
As a country, we also find ourselves paying an exorbitant price for all this debt. When the finance minister announced the new borrowing requirement for the current fiscal year at the supplementary budget in June 2020, the market immediately demanded a higher rate to lend to the National Treasury. Yields on the 10-year bond jumped from 8.625% to 9.425%, while yields on the 28-year bond jumped from 10.695% to 11.42%.
These were extraordinary yields when one considers that the SA Reserve Bank had reduced the policy rates to their lowest level in 50 years. Fortunately for us, the deficit has been easily financed, and as foreign investors have come back into the market the cost of debt has come down but still remains relatively high compared to other countries.
On February 24, finance minister Tito Mboweni will deliver the budget for the 2021/2022 fiscal year. I would urge him to pay particular attention to strategies that would reduce the cost of debt and the quantum of debt relative to GDP. Given the higher starting cash balances, the minister should ideally reduce the size of the weekly bond auctions as soon as possible.
There is also scope to take advantage of the ultra-low money market rates by borrowing much shorter tenures than in the past. Most of the people listening to the minister will be focused on spending proposals to re-ignite growth and social relief, given the past year’s tough economic conditions. But those plans could be derailed if the bond market collectively thinks the minister is squandering the revenue windfall he has just been given.
Finally, it is worth bearing in mind that if we continue to accumulate debt faster than the rate of economic growth the country will eventually go bankrupt. It’s a matter of when, not if.
• Madisha is the head of fixed interest at Sanlam Investments.
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