SA risks default with government’s rate of borrowing

Government is borrowing at the rate of R2.1 billion a day, a rate that puts us on a path of potential default. Finance Minister Tito Mboweni warns that SA has to avoid the fate of countries such as Argentina and Ecuador that defaulted on their sovereign debt this year.

The massive growth in SA’s national debt – expected to reach R5.5 trillion in 2023/24 – overshadowed all the good things Mboweni referenced in his budget speech, such as projected growth of 3.3% in the next fiscal year, the R100 billion set aside for job creation and the lack of tax hikes – for the moment.

The rand responded negatively to the budget address, weakening to R16.50/$ before rebounding to the high R16.30s as the market continued to focus more on global events and sentiment than local factors.

Following the speech, local bonds were about 10 basis points weaker, though part of this relates to global sentiment that was negative towards emerging markets generally.

Market scepticism

“With government debt remaining elevated and economic growth remaining subdued, the market demonstrated scepticism of the minister’s optimism and the green shoots he is witnessing in the economy,” says Bianca Botes, executive director at Peregrine Treasury Solutions.

“While there is commitment from Treasury to ensure economic growth, bolster employment and enhance the ease of doing business with South Africa, a concrete plan of action still needs to be provided and successfully implemented,” says Botes.

Mike van der Westhuizen, portfolio manager at Citadel, says the spiralling government debt is a concern, and the period required to return to budget equilibrium (zero primary deficit) has been pushed out from three to five years. “All of this is dependent on several things which are uncertain at this stage, including whether the state can get its public sector wage bill under control, and that’s already in doubt, and whether infrastructure spending will pan out as intended. That, too, carries considerable execution risk.

“Overall, there doesn’t seem to be a concrete plan to get us out of the fiscal mess we are in.”

There were some glaring omissions from his speech, according to a reaction report from Anchor Capital. “Nothing was said on … increasing taxes. We note that in June, Mboweni said he had no plans to raise taxes at present and we would presume that this still holds.”

Not unexpected, but SAA’s fresh bailout of R6.5 billion to settle its guaranteed debt and interest bill of R10.5 billion (on top of the more than R16 billion awarded earlier in the year) was not well received by opposition parties and economists, many of whom have argued for a cut-and-run approach to the ailing airline.

Read: Government bails out SAA again

The SAA bailout will be paid for out of cuts in basic service provisions.

This sets an uncomfortable precedent with regards to the government’s handling of problem state-owned enterprises, says Anchor Capital.

“Interestingly the Land Bank requires a further R7 billion bailout – this is quite sizeable when considered against their R2.2 billion of bonds in issue and previous bailout of R3 billion.”

Debt-to-GDP is now expected to stabilise at 95%, which is more realistic than previous assumptions of around 80%.

Good parts of the budget

Government reiterated its commitment to reduce spending growth, shift spending patterns and stabilise the debt-GDP ratio in the medium term. Positively, the projected fiscal consolidation is not premised on unduly optimistic revenue expectations or excessive tax hikes. Furthermore, economic growth estimates for 2021 (3.3%) and 2022 (1.7%) are more on the low side – thus leaving scope for a positive uptick, says Anchor Capital.

The majority of the government spending cuts are coming from the wage bill, and the deficit for 2020 remains as set out in June.

Government has so far been surprisingly committed to the wage bill savings, supported by the strong public sector wage growth in recent years and the context of severe pressure on private sector employment and income during the current economic crisis amid the Covid-19 pandemic.

However, in what forms some of the most positive aspects of the speech, the finance minister categorically ruled out prescribed assets and spending on debt to try stimulate the economy.

The wage bill

Daniel Silke, director at Political Futures Consulting, told the SABC that the minister of finance had to sell his proposed cost-cutting programme to the trade unions, a task fraught with difficulty.

Public sector salary increases have averaged 7.2% a year over the last five years, and it may be a difficult sell to get this within Mboweni’s projected inflation of 3% for 2020.

Opposition parties saw little to celebrate in the budget, arguing that Covid could not be blamed for where we find ourselves. Rather, a decade of financial mismanagement has pushed government’s back to the wall, where it is now borrowing abroad to cover its spending – which has a habit of coming out significantly higher than forecast, while tax revenues typically undershoot.