The National Treasury’s medium-term budget policy statement (MTBPS) showed policy continuity and ongoing commitment to structural reforms. This will anchor the credibility of the government of national unity. However, a look under the hood reminded me that things deteriorated greatly under previous administrations and we have grave problems that will take political will and commitment to resolve.
SA is not out of the woods insofar as long-term fiscal sustainability is concerned and the MTBPS shows this. Many in the bond market had assessed that there was scope, though small, for the Treasury to reduce borrowing. The authorities’ decision not to lower bond issuance is instructive. There is little space to curb borrowing because cash requirements, especially beyond the near term, remain punishingly high.
The key deliverable for any treasury is to have cash at hand when financial obligations fall due. The management of liquidity is therefore one of the most important, if not the most important, functions of a treasury department in any organisation, governments included. Looking at the liquidity pressures in the Treasury shows that fiscal pressures have not yet abated.
The government’s funding obligations can loosely be split into two categories. One is the fiscal deficit — the difference between expenditure commitments and revenues — and the other is annual debt repayments. At 5.6% of GDP the deficit, including adjustment for Eskom support, is an improvement compared with the 10% clocked in the fiscal year ending March 2021.
However, the fiscus is far from stable ground. The only time the deficit has been worse than current levels was during global crises, including the Covid pandemic and before that the global financial crisis. The Treasury is forecasting that the deficit can be reined in to 3.4% of GDP by 2028.
We have a wall of debt repayments coming up. The Treasury estimates that debt repayments this year will be about R100bn and rise to R300bn in the coming three years. As a percentage of GDP debt repayments will rise to 3.4% from 1.4% this year. Debt repayments are set to remain high into the end of this decade and beyond.
Relative to GDP our repayment rate is at levels last seen two decades ago. The overall funding requirement looks even worse when one considers the size of the government’s Treasury bill portfolio, which has to be refinanced annually. The size of this portfolio climbed rapidly during Covid and never went back. About half-a-trillion rand worth of Treasury bills must be refinanced annually, compared with about R300bn in 2019.
SA has historically raised very long-dated debt, an exception within the emerging market universe. However, our ability to borrow long at affordable levels eroded as we borrowed more, and now our obligations have become shorter dated in nature. Debt incurred in previous years now has to be repaid, and the chickens of the high debt mountain are coming home to roost. The state needs to borrow about R1-trillion a year, or 12% of GDP, to keep up with its commitments. The pre-Covid borrowing was about 10% of GDP.
This is not to say things have not improved, because they have. The deterioration in the fiscal metrics has stopped, and the medium-term outlook shows improvement. However, the challenge of keeping the state funded has not abated. The Treasury has used up its cash reserves in recent years, which has only served to increase liquidity risk.
The use of the Unemployment Insurance Fund (UIF) surplus during Covid offered a buffer, and so did the withdrawal from the Gold & Foreign Exchange Contingency Reserve. There could yet be another buffer somewhere, but this is a state that is liquidating its assets. In this context, the Treasury’s proposal for a fiscal anchor is sensible insofar as it could provide the policy credibility and fiscal space that the numbers are not yet reflecting while we wait for growth to bail us out.
• Lijane is global markets strategist at Standard Bank CIB.
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