RSS Feeds RSS | Views on ITInews | contact | terms of use | privacy 

Editorial Categories:


Forthcoming Events:

No Upcoming Events

Save by getting insurance quotes

Proudly South AfricanInforming Consumers and Financial Advisors since 1988 | Click Here to Advertise
Car, household, life and business insurance quotes

News Article : The Management of Government Debt
Category: Economy & Global : Local Economy
Author:Jac Laubscher
Email:[email protected]
Posted:03 Mar 2015

 Email this article Comment on this Article  Print this article

South Africa runs the risk of its credit rating being downgraded

Much has been written and said about last week’s national budget, but as usual there is one aspect that has not received a great deal of attention.

I am referring to how Government intends financing the budget deficit and the implications thereof for the course of government debt.

Usually only investors in the bond market analyse this part of the budget carefully to determine how it might affect their investment strategies.

As South Africa runs the risk of its credit rating being downgraded to below investment grade, which would eliminate a large portion of the pool of potential investors in South African government bonds and result in higher long-term interest rates, the details of the management of government debt has, however, gained a wider meaning.

Furthermore, in recent years foreign investors have been playing an increasingly important role in financing South Africa’s borrowing requirements at a time when international investors’ interest in emerging markets has balanced on a knife-edge.

Although the National Treasury has for many years been careful not to raise too many foreign loans owing to the associated foreign exchange risk (foreign loans accounted for 9% of government debt in January 2015 compared with a benchmark of 15%), it has no control over foreign purchases of rand-denominated government bonds.

In fact, 36% of domestic government bonds is currently held by non-residents compared with only 13,8% in 2009.

The government prefers to refer to South Africa’s net government debt (gross debt minus the government’s cash balances) rather than to the gross figure as it paints a rosier picture.

According to the budget South Africa’s net government debt, for example, is expected to reach a high of 43,7% of GDP by 2017/18 (which implies a continued increase of 2,9 percentage points from the level of 40,8% at the end of 2014/15).

If provisions and conditional commitments (mainly guarantees given to public enterprises such as Eskom) are taken into account, they would add a further 13,6% of GDP to the 2017/18 debt level for a total of 57,3%.

However, the gross government debt, which amounts to more than 48% of GDP, is of more importance to investors as this is the amount that has to be refinanced continually in the bond market. In any case, not all the cash held by the government is available for the financing of government expenditure.

Of the R182 billion held in cash at the Reserve Bank and commercial banks at the end of 2014/2015, only R45 billion is available for financing purposes.

The first priority is to stabilize the level of government debt relative to GDP and the budget is taking important steps in this direction.

However, these are not enough and the level of government debt will have to be lowered resolutely in the medium term to create room for possible future requirements.

To my mind the first target should be a reduction of 10 percentage points.

A relatively painless way in which to achieve this is for any increase in government revenue in response to an improvement in economic growth in the coming years to be utilised for debt reduction instead of increased spending. Should this not happen, further tax increases would be unavoidable.

At this stage it is also important to consider the future course of South Africa’s government debt (see accompanying graph).

Once government bonds amounting to only R48 billion in 2014/15 and R31 billion in 2015/16 have reached their maturity date, the amount increases to R69 billion in 2016/17 and R91 billion in 2017/18, after which it remains around this level for a number of years.

Therefore South Africa’s refinancing requirement will increase dramatically over the next few years and this at a stage when the availability of capital could be curtailed by rising international interest rates (although one should bear in mind that the difference between bond yields in emerging markets and those in developed markets would still be favourable).

Thus it is important for the National Treasury to manage the refinancing risk effectively.

Its proposed strategy of borrowing more than is necessary in the current relatively favourable climate and switching short-term bonds for long-term bonds as market conditions allow, is therefore prudent.

But what about the risk of possible high sales of local bonds by foreigners?

Fortunately there are two factors that would soften the impact of such an event.

Firstly, the withdrawal of foreign capital would have a negative impact on the rand exchange rate and result in an immediate repricing of South African bonds, which would discourage future sales by favourably impacting the value proposition.

Secondly, the presence of strong local financial institutions lends the necessary depth to the South African bond market to absorb foreign sales and dampen the resultant upward pressure on long-term interest rates.

Therefore there is no need to panic about South Africa’s government debt. The management thereof is in good hands.

The critical issue is the future course of the expenditure side of the budget – hopefully common sense will prevail.

Jac Laubscher, Economic Advisor: Sanlam Limited.

There are no comments at this stage. Be the first to comment!
Please Login To Comment On an Article - Click here To Login

ITInews invites comments at the foot of each of its articles in which readers can respond freely - anonymously if they wish - to various topical issues and industry debates. However, comments submitted by readers that are defamatory or deemed, by the editors, to be racist or obscene will be deleted from the database. Furthermore, ITInews's editor would like to caution potential posters on its websites that while it welcomes robust debate, it will not hesitate to make the IP addresses of the authors of such defamatory statements available to the authorities, in the event of a court order compelling them to do so.

Get car, home, life and business insurance quotes in 3 easy steps

Join us today

Insurance Quotes

Car Insurance Quotes
Household Insurance Quotes
Business Insurance Quotes
Funeral Insurance Quotes
Life Insurance Quotes

Read the InsuranceQuotes Blog

Economy & Global - Local Economy
Disaster Insurance
Global Economy
Local Economy

More in Economy & Global : Local Economy
Can South Africa avoid junk status? (Part 2)
The risk of a downgrade in the near future is relatively high
Can South Africa avoid junk status? (Part 1)
The South African government does not have a growth policy
South Africa falls short of national savings ‘pass rate’: first Savings Index launched
Investec GIBS Savings Index
Aligning monetary and fiscal policy
Is a tightening of monetary policy in conjunction with an unavoidably tight fiscal policy the best o
The effect of indigenisation, such as BEE, on financial development
Indigenisation as an economic intervention is frustrated by high levels of corruption
The insolvency U-turn
Euler Hermes Economic Outlook 2015-16
Where will growth come from? Part 2
A possible growth strategy in the current global environment
The (not-so-) hidden message of the Medium Term Budget
South Africa needs to reconstruct social consensus behind a path of accelerated economic growth
Where will growth come from?
The absence of an inherently independent growth dynamic in the economy
Contracting GDP detrimental to SME development
2015 was expected to be a better year ...
The SARB and the carry trade
Trying to support the exchange rate of the rand by hiking interest rates is an exercise in futility
Why small business does not create jobs
In South Africa we are self-employed out of necessity
The state of South Africa’s political economy
A pragmatic rather than an ideological approach
The Fall in Private Investment
South Africa’s potential growth rate has suffered long-term damage
A few thoughts on the slide in oil prices
The implications of lower oil prices for South Africa are numerous and mostly advantageous
SA consumers cut back on socialising as tough economic conditions
But gifting still a significant portion of budget
Visa African Integration Index shows improvement
But long way off the global median
South African digital economy the most developed in Africa – MasterCard Index
South Africa, Egypt, Kenya and Nigeria are quickly moving towards digital evolution
The threat of secular stagnation
It is generally accepted that structural reforms are the only answer
A medium-term budget: an effort to draw the line
Weak economic performance has enforced material consolidation of fiscal policy

Available Recruitment:
No Vacancies Listed...

ITM Website Design Cape Town
Copyright © 2005 - 2015 ITInews Online Publications (Pty) Ltd. All rights reserved Insurance Times & Investments Online and ITInews. ..::ISSN 1995-1256::.. No part of the materials including graphics or logos, available in this Web site may be copied, photocopied, reproduced, translated or reduced to any electronic medium or machine-readable form, in whole or in part, without specific permission from ITInews Online Publications (Pty) Ltd. Distribution for commercial purposes is prohibited.