The government cannot afford to make fiscal mistakes given that it has huge quantities of debt maturing over the next few years, which it may struggle to extend or roll over if global financial markets continue to be risk averse, Standard Chartered says.
Standard Chartered head of research for Africa and the Middle East Razia Khan said the government would need to reassure investors on SA’s politics and its resolve to control public spending if it wanted to keep them on side to buy its longer-dated government bonds. If it gave in on public sector wage demands that would be taken badly by investors.
The medium-term budget showed debt redemptions between now and 2031 will jump to almost R200bn a year, from an average R44bn over the past five years. But SA and other emerging markets have seen the cost of their debt balloon and access to capital markets reduce at a time when rising inflation and interest rates and the strong dollar have put a sudden halt to the easy money of the past decade or more.
While National Treasury manages the debt profile carefully, using frequent switch auctions to extend the maturity of its debt and smooth redemptions, this has become more difficult with international investors steering clear of emerging-market debt.
“Getting the confidence of markets, maintaining the confidence of markets, is going to be all important through this period of higher redemptions,” Khan said on a visit to Johannesburg.
“It would come as a test to any fiscus. But it’s all important for SA, especially in the context of the lower growth profile of the country compared to other emerging markets that they can say ‘we’re not going to let spending get out of hand ... we’ve said in the past that we spend too much on public sector wages’.”
In a week in which public sector unions got the go-ahead to strike, Khan said that this would be closely watched by investors. “If Treasury has to give in on this, it’s not a great argument for buying longer-dated SA government bonds.”
She said the Treasury would be doing everything it could, market conditions permitting, to reduce the risk of the concentration of redemptions in any one year. But it could only do that when risk conditions allow.
Risk appetite for emerging markets is expected to improve if there is a “policy pivot” in which the US Federal Reserve slows it rate hikes from 75 to 50 basis points.
Debt distress
But at a time when the IMF has warned that global financial tightening could see a new emerging-market debt crisis, with African countries particularly at risk of debt distress, SA
is still better off than much of the continent.
Khan said that with its relatively low level of foreign currency debt, SA was the exception in Sub-Saharan Africa, where Eurobond spreads have blown out and it was difficult for countries to issue debt in international capital markets.
It was not only new funding that was the issue but the fact that countries could not easily refinance their existing debt in external or in local markets.
Ghana this week continued talks with the IMF on a bailout, which is expected to require a debt restructuring that would impose losses on its private sector lenders. Zambia recently entered an IMF programme.
Goldman Sachs economist Andrew Matheny said the current global conditions had seen the whole single B-rated credit universe — which is most of Sub-Saharan Africa — locked out of market access.
“That’s OK for the time being because they don’t have immediate debt maturities. The major maturities are starting in 2024. But if this uncertainty persists and market access remains impaired for an extended period of time, it’s not just Ghana and Zambia that will be in trouble. It’s a much broader universe of Sub-Saharan African countries and other ‘frontier’ economies in Asia and Latin America and elsewhere who will face external liquidity issues and in the absence of international support or any major change in policy they would default.”
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