https://www.polity.org.za
Deepening Democracy through Access to Information
Home / Market IQ RSS Feed RSS ← Back
Close

Email this article

separate emails by commas, maximum limit of 4 addresses

Verification Image. Please refresh the page if you cannot see this image.

Sponsored by

Close

Article Enquiry

How the virus worsened South Africa’s debt woes

Verification Image. Please refresh the page if you cannot see this image.
Close

Embed Video

How the virus worsened South Africa’s debt woes

Photo by Reuters

27th October 2020

By: Bloomberg

SAVE THIS ARTICLE      EMAIL THIS ARTICLE

Font size: -+

South Africa is faces surging debt as the havoc wrought by the coronavirus pandemic compounds a deterioration in public finances caused by overspending, mismanagement and alleged graft during former President Jacob Zuma’s nine-year rule.

After cutting borrowing during years of strong economic growth from the late 1990s, the government posted its first post-apartheid budget surplus in 2007. However, Finance Minister Tito Mboweni’s medium-term budget will show on Wednesday that debt levels are much higher than in 1994, when the ruling African National Congress took over an almost bankrupt state.

Advertisement

While the rand is near its best level since March and bond yields have recovered from a blowout when a virus lockdown started, the generic ten-year yield remains above 9%, suggesting a risk premium is still priced in on the country’s debt.

Even before the virus, increased spending to grow the government workforce and bail out state-owned companies such as Eskom Holdings conspired with below-target revenue and slow economic growth to boost debt. As a percentage of gross domestic product, it will peak in 2024 in the Treasury’s best-case scenario. That’s provided the government takes active steps to stabilize the trajectory and revive the economy.

Advertisement

“South Africa’s debt position is going to be unsustainable over the next five years because the fiscal consolidation measures are unfeasible,” said Mpho Molopyane, an economist at FirstRand Group’s Rand Merchant Bank. “Treasury won’t be in a position to deliver.”

South Africa’s debt-service costs probably rose to 4% of GDP in 2019/20, the highest since 2003, and will climb even further. The cost of servicing loans has been the fastest-growing expenditure item since 2011 and is crowding out money for development, including education and health.

The virus forced the ruling party to break its long-held resistance to borrowing from the International Monetary Fund, securing a $4.3-billion dollar emergency loan to bankroll part of a stimulus package announced by President Cyril Ramaphosa. The Treasury may introduce a debt limit in the budget, a suggestion proposed by the IMF almost two years ago.

Talks with the World Bank may have reached an impasse after the government rejected initial conditions attached to the funds it seeks to borrow.

South Africa could exceed its domestic-funding requirements for the year after issuing debt at an “alarming pace” to fund the budget deficit, said Mike van der Westhuizen, a portfolio manager at Citadel Investment Services. The strong take-up in domestic long-term loans is largely due to the Treasury doubling the limit on non-competitive auctions to 100%, he said.

That could give the Treasury the option of slowing the pace of domestic bond sales for the rest of the fiscal year, or continuing at the same rate to cover for a possible larger-than-expected revenue shortfall.

Yields on the country’s generic, rand-denominated ten-year debt have climbed since 2012, when South Africa began its march toward a full house of junk credit ratings. It lost its last investment-grade assessment at Moody’s Investors Service in March, more than 25 years after it was first awarded. The downgrades raised borrowing costs and complicated efforts to narrow the budget gap.

South Africa’s low level of debt in foreign currency is seen as a strength because it makes the country less vulnerable to rand weakness and could make it easier for the government to roll over maturing debt, according to Elina Ribakova, deputy chief economist at the Institute of International Finance. It could make the path toward a debt crisis similar to that of Argentina or Greece slower and longer.

EMAIL THIS ARTICLE      SAVE THIS ARTICLE

To subscribe email subscriptions@creamermedia.co.za or click here
To advertise email advertising@creamermedia.co.za or click here

Comment Guidelines

About

Polity.org.za is a product of Creamer Media.
www.creamermedia.co.za

Other Creamer Media Products include:
Engineering News
Mining Weekly
Research Channel Africa

Read more

Subscriptions

We offer a variety of subscriptions to our Magazine, Website, PDF Reports and our photo library.

Subscriptions are available via the Creamer Media Store.

View store

Advertise

Advertising on Polity.org.za is an effective way to build and consolidate a company's profile among clients and prospective clients. Email advertising@creamermedia.co.za

View options
Free daily email newsletter Register Now