Stanlib, one of SA’s largest asset managers, says the country’s persistent budget deficits present the biggest threat to SA’s credit rating in the near term.
Government expenditure has exceeded its revenue since 2014 and is expected to do so until 2025, forcing the National Treasury to increase its borrowing to fund the budget deficit.
However, Stanlib, which has more than R600bn in assets under management, said it does not believe the weakening fiscal position will lead to a credit downgrade in the short term.
“Our analysis suggests a modest increase in the weekly borrowing requirement would be sufficient to fund this increased budget deficit, which we believe the markets have already discounted,” said Tarryn Sankar, head of credit in the fixed-income division at Standard Bank’s asset manager.
“We believe the Treasury will continue to raise more funding via relatively more cost-effective floating rate notes and treasury bills and possibly tap the sizeable cash reserves held by the Corporation for Public Deposits.
“There is some uncertainty over the Treasury’s issuance of a R20bn sukuk bond, an Islamic finance debt instrument. The auction was expected earlier [in October] but was postponed.”
In its funding strategy outlined in February, the Treasury said part of it is additional issuances into existing and new floating rate notes and a domestic rand-denominated sukuk.
Over the next three years, the government will service R184.4bn of Eskom’s debt, consisting of capital repayments and interest payments. And in 2025/26 the government will take over a maximum of R70bn of Eskom’s debt by switching selected debt instruments into government debt.
The Treasury has said this will be financed by issuing short- and long-term loans in the domestic markets.
As a result, the gross borrowing requirement will increase from R515.6bn in 2023/24 to R555bn in 2025/26.
Due to a strong revenue performance on the back of solid corporate income tax receipts, the government did not borrow from the Corporation for Public Deposits during 2022/23, a situation Stanlib expects to change.
Sankar said SA’s weak fiscal position is balanced by a respected monetary authority in the form of the Reserve Bank and an apolitical judiciary.
“In addition, the agencies believe SA can sustain higher levels of debt than other countries with the same rating because it has a deeper domestic investor base and an existing stock of long-duration local currency debt,” Sankar said.
“SA’s pension system, mutual funds and insurance sector together manage assets equivalent to 210% of the nation’s GDP.”
SA’s nonbanking institutions have significantly increased their holdings of SA government bonds. Domestic unit trusts accumulated almost half of the R73.26bn of SA government bonds issued since November, while pension funds gobbled up 21% and long-term insurers 10% as local participants stepped in to absorb foreign investors’ declining appetite for new SA government bond issuances.
Foreign investors have been selling SA government bonds since 2019, the Reserve Bank said in its latest financial stability report, flagging this as “a significant structural shift, especially considering the significant increase in government bonds issued during this period”.
The Bank said the flight by offshore investors raises concerns about the capacity of local investors to continue absorbing new issuances of SA government bonds in the future.
The biggest ratings agencies — Fitch, Moody’s and S&P, which are seen as the gatekeepers of the bond markets — in 2022 improved the outlook for SA’s sovereign credit ratings. But they all expressed concern about power cuts, the high debt burden and significant fiscal risks.
“We see little risk of a cut to ‘negative’ since we think they have already priced in concerns over debt affordability.
“Moody’s expects the government’s primary balance [net revenue available to service debt] will remain negative in 2023 and 2024 and reach break-even by the end of fiscal 2025,” Sankar said.
“When Moody’s last downgraded SA in 2020, the gross borrowing requirement was 22% of GDP, but this has improved to 15.5% in 2022/23, reflecting Treasury’s significant success in increasing the efficiency of tax collection and its growing commitment to fiscal discipline.”
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