EDITORIAL: Mboweni needs to convince investors fiscal crisis not inevitable
SA must show real progress that it can deliver the reforms needed to deliver GDP growth on a sustainable basis
Given recent history, it’s hard to say what the markets should expect from finance minister Tito Mboweni on Wednesday.
Even if he says all the right things, it’s debatable how much weight his words will have, given the conflicting drivers of the Covid-19 pandemic and pressure to spend, ANC politics and the need to appease credit ratings agencies with a credible path to debt consolidation.
A look at the financial markets would indicate that they haven’t yet lost hope in SA and there might still be a way out. At R16.13/$ on Tuesday, the rand was still way off its lows in April, when hitting R20/$ seemed to be just a matter of time. Likewise, the bond market has shown some stability, with 10-year yields staying at just more than 9%, even as the Reserve Bank has reduced its purchases, indicating there is demand for SA assets, not least from local banks.
Of course, that these are among the highest yields around, even for emerging-market economies, points to a risk that remains elevated. That’s even more so when one looks at borrowing costs for maturities of 10 years or more relative to shorter-dated notes.
Observers have attributed the steepening of the yield curve to concerns about the sustainability of government borrowing. Economists at Investec see a 10% chance of SA defaulting on its debt in five years’ time, and that’s on the basis that Mboweni sticks to the debt path promised in the supplementary budget in June.
And that’s a punishing goal to limit debt as a percentage of GDP to 87.4% by 2023/2024. That’s a long way from the levels, at just more than 20%, that Trevor Manuel, SA’s longest-serving finance minister, handed to Pravin Gordhan at the start of the “lost decade” presided over by former president Jacob Zuma.
The problem for Mboweni is that very few in the market believe his “active scenario” is credible. There is a view pushed by some, including President Cyril Ramaphosa’s economic advisory committee, that he might be better off throwing in the towel on that target. They suggest a more achievable, and credible aim, would be to try to stabilise debt at 100%.
This doesn’t look unreasonable if one considers that the IMF expects sovereign debt to GDP in advanced economies to reach about 125 % by the end of 2021. But if one looks at the projections for emerging-market economies, at about 65%, then it becomes clearer how much trouble SA is in.
Richer countries have the advantage of holding reserve currencies and bond markets that are regarded as safe havens, meaning they are able to borrow at record-low rates, and, in some cases, can even charge a fee to hold investors’ money. SA will be competing with the rest for capital.
Given the recent past of slippages, will any investor take any promise by SA to keep the debt-to-GDP ratio at 100%? Could they be expected to believe that somehow this time it is different? Investec’s Annabel Bishop suggests that the country’s credit rating — already below junk among all three major ratings companies — will be lowered another two notches in the event of SA taking the path suggested by Ramaphosa’s advisers.
Dutch bank ING identified SA among the emerging markets that will see debt-to-GDP ratios deteriorate, even as the global economy recovers in 2021. On SA, debt sustainability, was “a big concern to us,” it said in June.
Telling the market to expect yet more slippage would be exactly the wrong message for Mboweni to give, especially given the government’s record. In the long run, the ball is really in Ramaphosa’s court. To keep investors interested, SA needs to show real progress that it can deliver the reforms needed to deliver GDP growth on a sustainable basis, and that’s the only realistic way to regain control more than the debt trajectory.
Historical precedent suggests there is good reason to be sceptical, but maybe the hole now has become so big that those in power, for their own self preservation if nothing else, might believe that this time it really has to be different.
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