Business for SA (B4SA) has warned that the government will be unable to fund the budget from domestic savings over the next three years, making it necessary for the country to raise a far larger portion of capital in foreign markets.
The warning comes as finance minister Tito Mboweni prepares to table a supplementary budget in parliament on Wednesday, made necessary by additional spending because of the Covid pandemic and a dramatic collapse of tax revenue.
A higher share of debt in foreign currency will significantly heighten the risk of a sovereign debt crisis for SA in the future. At present only 10% of government debt is dollar-denominated and most funding is raised in the domestic capital market.
This has been a large factor in SA’s favour despite escalating debt, unlike its crisis-hit emerging market counterpart, Argentina, which is struggling to generate enough dollars in a recession to pay a huge pile of foreign currency-denominated debts.
At a meeting at Nedlac on Friday, Mboweni revealed the true horror of the state of SA’s public finances, forecasting a budget deficit of more than 14% and an escalating debt burden, which will soon outstrip the size of the economy.
In the next three years, the debt-to-GDP ratio will reach 90.9%, according to the Treasury, and will continue north, hitting 113% by 2028/2029.
The Treasury forecasts that the economy will shrink 6.4% over 2020 — a contraction last experienced in 1930 during the Great Depression.
The supplementary budget was made necessary by the Covid-19 pandemic and the associated economic crisis, which has sent 95% of countries into depression.
Forecasts by B4SA, which also made a presentation to the meeting on Friday, are more dire. The contraction in the economy for 2020 could be between 8% and 11% and the budget deficit — the difference between government revenue and expenditure — 13.3%.
If a deficit of this size persisted due to weak economic growth and a failure to implement structural reforms, the debt-to-GDP ratio would exceed 100% of GDP by 2023, it said.
The supplementary budget will set out spending and funding plans for the government’s R500bn Covid-19 support and response package.
Mboweni has said that R130bn of the package will be reallocated from other government departments, to support the department of health and to increase social grants payments.
The government hopes to raise R95bn from international finance institutions. On Saturday the New Development Bank announced a $1bn (R17bn) loan for SA. The government has also applied to the International Monetary Fund for $4.2bn in emergency Covid funding.
Additional borrowing and the collapse in revenue have caused a sharp deterioration in the debt trajectory. In February, it was thought the debt-to-GDP ratio would reach 71.6% by the third year of the budget framework. The budget deficit was expected to be 6.8%.
Additional support
B4SA also warned that the R500bn stimulus — especially given the low take-up of the R200bn loan scheme — might not be sufficient and the government might have to consider additional support to large companies in distress and employers, such as tax relief. State-owned entities may run into further trouble, it said. Both measures will require the state to raise further funding.
The debt trajectory assumes that no action is taken to cut spending or raise additional taxes. Tax measures can only be announced in the main budget in February. At most the supplementary budget could suggest that taxes will be raised in February 2021.
But cutting expenditure on investment such as public infrastructure will be negative for growth. On Tuesday, President Cyril Ramaphosa will host the inaugural infrastructure conference to maximise the effect of public spending on investment and encourage private sector participation.
B4SA said sustained investment spending was crucial. But the government’s increased funding demands mean it will have to access capital offshore.
"Domestic savings will be insufficient to fund the investment required to deliver the necessary level of economic growth, and therefore capital will have to be found internationally, where SA must compete with other emerging markets as a globally attractive investment destination."
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