The National Treasury reaffirmed its commitment to consolidating public finances to narrow the budget deficit on Wednesday, but with government debt growing at a much faster pace — and the newly issued debt becoming more expensive to service — rising debt-service costs have pushed borrowing across the economy.
Speaking at a media briefing ahead of the tabling of the medium-term budget policy statement (MTBPS), deputy finance minister David Masondo said debt has grown much faster than the economy and newly issued debt has become more expensive to service.
“Not only do rising debt-service costs push up the cost of borrowing across the economy, the rising cost of servicing government debt reduces the amount of money available for meeting national development objectives,” Masondo said.
“This crowding out effect means that debt-service costs consume a greater share of the budget than social development, health, community development, economic development or peace and security.”
The Treasury now expects the gross loan debt to stabilise in 2025/26 at 77.7% of GDP, higher than projected in the 2023 budget, mainly due to an increase in the main budget deficit.
Treasury data shows the consolidated budget deficit has risen to 4.9% of GDP in 2023/24 compared with the estimate of 4% of GDP in the 2023 budget.
As a percentage of GDP, gross loan debt increased by 47.2 percentage points between 2008/09 and 2022/23.
Compared with the 2023 budget estimate, debt-service costs will increase by R14.1bn to R354.5bn in 2023/24. These costs will reach R455.9bn, or 5.4% of GDP, by 2026/27.
As a share of main budget expenditure, debt-service costs will increase from 17.3% in 2023/24 to 19.2% in 2026/27.
The scale and duration of SA’s debt accumulation, alongside the slow rate of economic growth, means a primary budget surplus is needed to stabilise debt as a percentage of GDP and arrest the escalation in interest costs.
Treasury’s current estimate of the primary surplus required to stabilise debt is 1.3% of GDP.
The Treasury’s medium-term fiscal framework includes a combination of small revenue increases, spending revisions and increased borrowing.
According to Treasury, SA has over the past 15 years accumulated one of the largest increases in government debt as a share of GDP.
The debt accumulation has led to a rapid increase in debt-service costs, which now consume more than 20% of main budget revenue, or for every R5 collected in revenue the government pays R1 to lenders instead of funding education, policing, health and other critical services.
The medium-term budget policy statement states that debt-service costs are now estimated to reach R385.9bn in 2024/25 and R455.9bn in 2026/27.
Treasury director-general Duncan Pieterse raised concerns over the country’s fiscal position and how its growth outlook has increased the risk premium — the additional return investors require to compensate for country-specific risk — attached to SA bonds.
“This makes it more expensive for government to borrow in line with its spending plans,” he said.
He said borrowing costs have risen across the yield curve, meaning that regardless of the maturity profile of loans and bonds, investors are demanding a premium to compensate them for the risks of investing in SA.
“Since 2013/14, SA’s interest on debt has exceeded the rate of economic growth, implying that the economy is not able to generate enough revenue to pay the additional interest costs,” he said.
Pieterse said this borrowing will be used for three purposes.
“First, to finance the gap between what government spends and the revenues it collects. Second, to refinance the redemption of maturing debt and, third, to finance the Eskom debt-relief arrangement.”
Pieterse said the gross borrowing requirement for 2023/24 has increased from R515.6bn to R563.6bn, relative to the 2023 budget.
He said higher global monetary policy rates and inflationary pressures have led to an increase in the weighted cost of funding — the average funding cost weighted proportionally by each funding instrument — from 8.3% in February to 9.5% in October.
Debt redemptions will increase from R155.5bn in 2023/24 to R187.7bn in 2025/26, averaging R175.7bn over the medium term.
“To manage these redemptions, government will exchange some of the redemptions expected in the current year and over the medium term for longer-dated bonds as part of the ongoing bond switch programme,” he said.
Over the medium term, the gross borrowing requirement will average R553.7bn. Long-term borrowing in the domestic bond market is expected to increase to R463.6bn in 2025/26 and then decline to R349.1bn in 2026/27.
Pieterse said the fixed-rate bond yield curve, the relationship between bonds of different maturities, weakened by 95 basis points between February and September.
“Higher yields indicate higher borrowing costs,” Pieterse said. “This reflects the weaker fiscal position, monetary policy tightening, geopolitical conflict and the domestic energy crisis.”
He said in the 2023/24 financial year, government will raise $2.4bn through concessional funding from international financial institutions to meet its foreign-currency commitments.
“Over the next two years, government will draw down on its foreign exchange balances and continue accessing financing from global financial institutions to meet such commitments,” he said.
Gross loan debt is expected to increase from R5.24-trillion in 2023/24 to R6.52-trillion in 2026/27.
The Treasury said the key drivers of this increase remain the budget balance and fluctuations in the interest, inflation and exchange rates.
The department said a contingency reserve, amounting to R27.1bn over the medium term, cushions the fiscal framework against changes in the economic environment and unforeseeable spending pressures.
“Fiscal risks remain elevated in the short to medium term,” Masondo said. “The major risks to the fiscal framework include weaker-than-expected global and domestic economic growth, which would slow revenue growth and widen the budget deficit.”
He said there are higher borrowing costs as a result of an elevated risk premium and tighter global monetary conditions.
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