This week’s national budget is likely to feature two new fixes for SA’s public debt problem — a new fiscal anchor and the Gold & Foreign Exchange Contingency Reserve Account (GFECRA) could help avert a debt crisis by slowing the growth of the national debt and lowering its cost.
But unless SA can lift its economic growth rate and find political consensus on the big policy choices that are needed, neither can offer more than a temporary fix to a longer term, structural problem. Government debt, which is already over R5-trillion, is expected to exceed R6-trillion in the next two years, rising from about 75% of the size of the economy to over 77%, whereas Treasury projected in November it would stabilise by 2026.
In themselves, the absolute numbers might not matter. But SA’s debt has been growing faster than its ever more stagnant economy for the past two decades, as well as faster than other emerging markets. The cost of that debt is consuming an ever larger share of SA’s economic and fiscal resources, taking 20c of every rand government collects in taxes.
The government is now in a classic debt spiral, where it is borrowing to pay interest on existing debt. It’s a vicious cycle where the more it borrows in a market with limited capacity, and the more lenders and investors worry about its ability to repay its debt in decades to come, the higher the interest rates (or yields) they demand to buy its bonds, particularly longer term bonds.
With the commodities boom well and truly over, the Treasury had already cut its revenue projections in November’s medium-term budget and upped its estimate of where the debt would stabilise, assuming the government can deliver on the huge R213m of spending reductions the finance minister has pencilled in for the next four years. Some economists believe revenue and spending are roughly on track, but most are sceptical, predicting higher deficits and a debt ratio that will head to 80% or higher, without stabilising.
Even if finance minister Enoch Godongwana can show a plausible medium-term framework in which spending is contained and debt stabilises, economists now discount the fact that the spending path revealed on Wednesday isn’t likely to be the one that materialises. For example, the Treasury may budget for zero or low public sector wage increases, but everyone knows the unions will demand more. If it doesn’t extend the R350 social grant at first, it may do so later; if it avoids a Transnet cash injection now, this is inevitable some time soon.
When it reduces spending growth with a sleight of hand that takes the Eskom bailout out of spending and accounts for it as debt, economists just add it back to spending. The credibility of medium-term budgeting that was built so carefully in the early days of democracy has eroded, and it will be even more difficult to re-establish in the more contested and chaotic era of coalition politics that could follow this year’s general election.
That’s one of the reasons the government’s borrowing costs are so much higher on long-term than short-term debt; what the markets are saying is that while public finances may be on track for the next couple of years, they are none too confident about the trajectory a decade or two down the line.
One “fix” that is suggested is a new fiscal rule or anchor which, in the words of the IMF, would improve the institutional fiscal framework and “support growth-friendly fiscal adjustment”. The Treasury said in its medium-term budget policy review that it would develop such a fiscal anchor to ensure sustainable public finances, and provide an update in this week’s budget.
SA already has an old anchor: in 2012 the Treasury introduced an absolute cap on government spending each year. It’s tempting to dismiss this as a failure, but Wits University’s Michael Sachs, a former head of the Treasury’s budget office, points out that the government did stay below the expenditure ceiling until the Covid-19 pandemic.
By contrast, the IMF wants to see SA impose an explicit debt ceiling to anchor the expenditure ceiling. It has called for SA to cut its debt towards common debt ceilings of 60%-70% globally. But what level would be appropriate? If SA’s debt were a lot cheaper and the economy was growing faster, it could in theory sustain a far higher debt level. Any target may be a bit arbitrary. Another option that has been suggested is to target a primary budget surplus, as the Treasury already tries to do because that’s the way to stabilise the debt.
In theory, a fiscal anchor or rule would help rebuild the credibility of the budget by keeping the government on track with the programme and instilling confidence in investors and so cutting borrowing costs. But any anchor is only as good as the government behind it.
A second, more tangible, fix for government’s debt woes is the GFECRA, which houses the unrealised profits or losses on SA’s gold and foreign exchange reserves. These have climbed to almost R500bn thanks to a rising gold price and depreciating rand and are — unusually in SA — for the account of the Treasury, which would need the Reserve Bank’s agreement to draw on these profits. It has said an announcement will be made at budget time.
RMB Morgan Stanley economist Andrea Masia expects an initial transfer of up to R100bn, but only once the details of a new governing framework for the GFECRA are finalised later this year. This could shave 0.7%-1.5% of GDP from the fiscal deficit and make the government’s financing strategy look more sustainable, he said in a recent note.
To realise the GFECRA profits the Reserve Bank would either have to sell foreign reserves or print money. Either prospect inevitably prompts some panic about raiding the family silver to finance an irresponsible government. The counterargument is that the GFECRA is simply part of the broader public sector balance sheet. Sachs argues that even if public finances are weak, the public sector balance sheet is still strong, and it can be mobilised to “soften the blow of austerity”.
But it does matter how it’s done, and what it’s used for. To prevent the money that is printed being inflationary, the Bank would probably issue short-term securities, on which the Treasury would have to pay interest — though at the current 8.25% repo rate that would still be a huge saving on the 12% interest the government is paying on its long bonds. The proceeds would probably count as revenue, reducing the deficit. Better still would be to earmark the proceeds to reduce debt, either government’s or Transnet’s.
Done responsibly, the GFECRA would help on the debt side. But it’s not free money. And it’s a one-off fix that doesn’t address the underlying problem: slow economic growth, a high country “risk premium” that drives up the cost of borrowing, and a government without the political coherence or political will to make serious policy choices on how to spend fiscal resources, which will remain scarce as long as growth and the economy’s revenue capacity remain weak.
• Joffe is editor-at-large.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.