Finance minister Enoch Godongwana
LONDON – The National Treasury’s latest foray into the international debt market raising $3 billion (about R43bn) through a two-tranche bond issuance on Tuesday comes at a risky time.
Several gatekeepers of the international financial system are warning of a “dangerous global debt burden” amid renewed uncertainty of the energy and commodity price impact of the war in Ukraine, stagflation in several major economies, and a persistent pandemic now in its third year.
Public debt was already high before Covid-19, but the pandemic unleashed unprecedented levels of public borrowing only to be exacerbated by events in Ukraine and inflationary pressures in most economies.
A day before the Treasury’s bond issuance, the IMF in a “Johnny-come-lately” blog called for the urgent need for authorities to undertake reforms, including governance reforms, to improve debt transparency and strengthen debt management policies and frameworks to reduce risks.
The incidence of debt distress and prospects of new defaults have never been so marked, especially in low-income countries.
According to the IMF’s Global Debt Database, borrowing increased by 28% to 256% of GDP in 2020, with government debt accounting for half of this increase and the rest by corporates and households. Public debt now accounts for 40% of total global debt.
S&P Global estimates sovereign borrowing will reach $10.4 trillion in 2022, nearly one-third above the average before the Covid-19 pandemic.
The elephants in the room are that despite some rebound in 2022, public debt levels will remain elevated due to high cost of funds, increased debt servicing, the macroeconomic impact of the war in Ukraine, high inflation, sluggish growth rates and polarised social and political landscapes.
For South Africa there is an additional challenge in that its debt-to-revenue ratio is low albeit it had improved in 2021.
Moody’s Investor Service on April 1 saw fit to affirm South Africa’s long-term foreign and local currency debt ratings at “Ba2” and revised the outlook to stable from negative. The reason, said Moody’s, is “the improved fiscal outlook based on better-than-expected revenue collection that raises the likelihood of the government’s debt burden stabilising over the medium term.”
Should Finance Minister Enoch Godongwana get some plaudits for his stewardship of the economy since he took over from Tito Mboweni? The jury is still out for there are considerable headwinds ahead – both external and internal.
The latter include a motley lot of financing demands to address urgent social needs, promote job creation through the presidential employment initiative, support the public health sector, public sector wage demands, reining in the SoEs, investment in infrastructure, the rural economy and transition to a clean and just energy future as highlighted by phasing out dependence on coal-fired power stations.
Moody’s expects the Treasury’s fiscal consolidation policy to continue. However, the opportunity cost lost is that the Treasury is using a portion of the additional revenue to accelerate debt stabilisation, in other words to pay off the debt more quickly.
The latest $3 billion bond comprises a 10-year $1.4 billion bond maturing in 2032 priced at a coupon and re-offer yield of 5.875%, which represents a spread of 309 basis points above the 10-year US Treasury benchmark bond; and a 30-year $1.6 billion bond maturing in 2052 priced at 7.3% representing a spread of 447 basis points above the 30-year US Treasury benchmark bond.
The fact that the issuance was oversubscribed 2.4 times suggests that global institutional investors are comfortable with South African country and credit risk.
It also comes two months after the Treasury’s $750 million development policy loan from the World Bank to accelerate the government’s ongoing Covid-19 response, especially aimed at protecting the poor and vulnerable and supporting a resilient and sustainable economic recovery. This brings the Treasury’s foreign borrowing to date in 2022 to $3.75 billion.
The Treasury could have opted to issue a Sukuk in the international markets. It has repeatedly said in three successive budget statements that it intends to do so in the rand market “at the right market conditions”.
Judging by the proliferation and demand from international investors for sovereign Sukuk issuances and rising yields to investors in global markets, pricing for a equivalent Sukuk issuance could have been even tighter.
South Africa’s public debt burden remains of “serious concern” and is estimated to reach R4.3 trillion in 2022 and projected to rise to R5.4 trillion over the medium-term.
The Treasury’s own forecast for the 2021-25 period suggests debt-service costs to average 10.7% per year, rising from R268.3 billion in 2021/22 to R301.8 billion in 2022/23 to R335.0 billion in 2023/24 to R363.5 billion in 2024/25. To put it in context, the latter is equivalent to the entire social development budget allocated by Godongwana in Budget 2022 of R364.4 billion.
Whether the Treasury’s debt stabilisation strategy is sustainable as the rating agencies and the IMF seem to suggest, albeit with the usual caveats, only time will tell.
It’s not only the debt servicing costs that are at play here, but also the underlying factors that contribute to the spiralling debt which include ideological economic dogma, a bloated bureaucracy, cadre deployment, a R1.3 trillion social safety net which is higher in terms of per capita income than some developed economies, public sector wage inflation, and of course the legacy impact of state capture, procurement corruption and bailing out failing SoEs.
These are some of the structural reforms that Godongwana is trying to inculcate with the encouragement of the IMF, World Bank and rating agencies.
Given that 175 out of 257 municipalities are in financial distress, which according to a FTAF report includes widespread corruption and AML transgressions, President Cyril Ramaphosa in his latest Imbizo in Bloemfontein last Saturday evoked “national intervention in the governance” of the provincial capital and the municipality of Mangaung aimed at “relieving the dire financial position of the municipality and addressing issues affecting communities.”
Getting public debt under control is not an option but a necessity. Failing that, what a legacy for the next generations of South Africans! In the immortal words of the 31st President of the US, Herbert Hoover, “Blessed are the young, for they shall inherit the national debt.”
Parker is an economist and writer based in London
Cape Times
Related Topics: