On the eve of the release of data likely to show a flatlining economy, deputy finance minister David Masondo said the government is determined to take the necessary action to fix an unsustainable financial position that is threatening to cost the country its last remaining investment-grade rating.
At a conference hosted by JP Morgan Cazenove in Cape Town on Monday, Masondo said public debt, which is forecast to reach 60% of GDP in this fiscal year, is “not sustainable” and the government wants to move away “from the recent trend of the fiscal budget increasingly becoming a bailout fund for state-owned enterprises”.
Masondo’s comments come amid pessimism, reflected in rising bond yields, that the government has the political will to cut public-sector wages, which consume 46% of tax revenue and force through reforms of state-owned enterprises instead of continually propping them up with borrowed money.
Eskom, which is weighed down with more than R450bn in debt, is due to receive R230bn in support from the ailing fiscus in the coming decade, while the government is in the midst of discussions over the future of SAA, the insolvent airline that is seeking a R2bn loan guarantee to allow it to continue operating.
“Currently, a significant part of our expenditure does not only go to the wage bill, but bailouts of underperforming SOEs. These bailouts have become unaffordable,” said Masondo.
The cost of rescuing failing SEOs has been identified by ratings agencies as one of the biggest risks to the economy. Moody’s Investors Services, the only major company that has SA at investment grade, changed its outlook on SA debt to negative in November, signalling it may cut the country to junk if the government does not show sufficient progress in fixing the economy and its finances in February 2020’s budget.
“A ratings downgrade will make things substantially worse by raising the cost of borrowing for the government, SOEs and this will spill over to private enterprises and eventually all borrowings across the economy,” Masondo said.
The possibility of a downgrade, and potential outflows that deputy SA Reserve Bank governor Kuben Naidoo said could put as much as $8bn (R117bn) of bonds at risk of being sold by foreign investors, is already reflected in the market.
Yields on 10-year bonds have risen in each of the past three months to the end of November and were at 9.24% on Monday, from 8.59% in July. The yields, which move inversely to price, have risen despite inflation undershooting midpoint of the Bank’s 3%-6% target. This is because investors are betting on higher borrowing costs for the government due to its dismal fiscal position.
Masondo’s remarks came a day ahead of Stats SA’s release of the latest GDP data, which will probably confirm that the economy has seen no growth in 2019 so far.
After a rebound of 3.1% in the second quarter, off a 3.1% contraction in the first three months, economists expect GDP to be 0% in the third quarter, according to a Bloomberg survey. A lack of growth hurts tax collection, making it less likely that the government will meet targets and satisfy ratings agencies that it can stabilise its finances.
“We need speedy implementation of reformist measures” to boost the economy, said FNB economist Matlhodi Matsei.
“Though these will take some time to bear fruit ... the sooner we implement, the quicker we can boost business confidence and perhaps incentivise fixed investment.”
Lumkile Mondi, senior lecturer at the Wits School of Economics and Business Sciences, said the government still has to do much more if it wants to generate growth of 2% in the next two years.
“An ideological battle” is taking place between reformers in President Cyril Ramaphosa’s administration and statists, said Mondi. “Unless we take reform seriously, we are going to be trapping ourselves into a low-growth economy,” he said.
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