Treasury set the clock ticking on the medium-term budget this week, announcing that its officials would go into the traditional “closed period” on September 23 ahead of the budget on October 26. With just two months to go, economists and organised business folk are sounding the alarm very loudly about the national debt.
But at first glance it may not be clear why. Treasury figures for the first quarter of the fiscal year that started on April 1 show government revenues are again running far ahead of February’s budget estimates, with corporate income tax collections again shooting the lights out as they did last year as the commodities boom continues. For the first time, economists say, the figures show a small first-quarter fiscal surplus. They show too that the government is sitting on a cash pile of close to R400bn.
True, government debt has soared to 70% of GDP from just 24% in 2007, with debt costs now consuming one-fifth of all the revenue the government collects. But February’s budget projected the debt would stabilise at 75% in 2024/2025, and the economy and revenues have done somewhat better than expected since then.
But the world has done a lot worse. This is one reason for the alarm. The Russian invasion of Ukraine came just one day after the February budget. US and global inflation rates were already rising but the war multiplied that, and the US interest rate hike story since then has driven wild gyrations in global financial markets, with bouts of risk aversion and dollar strength that have hit emerging markets particularly hard.
Foreign investors have been selling off their bonds. The rand has weakened; yields on government long bonds have risen sharply in SA, as they have in other emerging markets. SA’s 10-year bond yield is now trading at about 10.3%, which is better than the 11.1% it hit in July but significantly weaker than the 9.1% at which it was trading in February. Longer bonds look even worse.
Both the cost and the stock of government debt are sensitive to changes in exchange rates, and highly sensitive to changes in yields. A weaker exchange rate makes it more expensive in rand terms to service foreign debt, and increases the rand value of that foreign debt.
But the effect of higher yields is even more profound, and complex. Essentially, the higher the yield, the more bonds the government has to issue to borrow the same amount of cash on the market. So, for example, at a bond yield of 11%, the government might be raising just R860,000 for every R1m of bonds it issues. (The logic is that when it sells new bonds it has to offer investors a discount that ensures they will get the same or better return than they would have earned if they just bought existing bonds of similar maturity on the market.) That adds to the cost of debt because the government has to issue more debt, and at a higher yield or interest rate.
Business Unity SA estimated last week that the cost of government debt is running R9bn ahead of budget estimates. And where February’s budget pencilled in R330bn of domestic long-term borrowing on the bond market, RMB economist Kim Silberman estimates the actual figure will run R70bn short of that because of higher-than-expected yields.
The Treasury is filling the gap with a new funding instrument that the market has long wanted and which other emerging markets such as Brazil have been making great use of. In July, the Treasury issued its first floating rate note. Unlike a bond that has a fixed “coupon”, or interest payment, the floating rate notes have an interest rate that reprices every quarter and is linked to the benchmark Jibar rate. It’s expected about R80bn of these notes will be issued in the current year. They are relatively expensive short-term funding but much cheaper than issuing long-term bonds.
SA has also turned to international financial institutions for cheaper finance. A further move by the Treasury as part of its efforts to improve the government’s funding strategy is that it will not do any switch auctions this year. Usually, Treasury switches shorter-term for longer-term bonds once a month or so to lengthen the average maturity of government debt and make it less risky — even if more expensive, given that SA’s long-term interest rates are much more expensive than short-term ones because of the perceived risk. With no switches, it will simply have to redeem or repay the capital on those bonds once they fall due.
And redemptions are another big debt danger in coming years. Indeed, Nedbank CIB economist Reezwana Sumad estimates that the government’s entire cash holding will be needed just to cover redemptions. There are particular concerns in the medium term about the benchmark R186 bond, which was issued in the late 1990s — to the tune of about R274bn — and is due to be paid back from the end of 2025. More immediately, R60bn of bonds and a further R155bn of foreign and inflation-linked bonds are due for redemption this year and next, Silberman estimates.
If global markets become even more hostile to emerging markets and SA, the government’s funding arithmetic could look even more risky. And that goes back to the question of how much it will need to borrow, now and into the future.
Fitch analyst Jan Friedrich doesn’t buy the government’s debt stabilisation story: he expects the debt ratio will reach 80% by 2026 and rising. And he is hardly the only sceptic, given that the commodities boom is losing steam and spending pressures are mounting. Sumad’s researches reveal that the government has a long history of underestimating its spending, even more than it underestimates its revenue. Between 2007 and 2022 revenues recorded a cumulative overshoot of R42bn relative to budget estimates but spending recorded a R171bn overshoot.
History suggests then that the national debt danger is not going away any time soon.
• Joffe is editor at large.
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