How strange that anyone still makes a fuss about a new World Bank loan, as the EFF did last week, but not about he government’s total borrowing, or its cost.
Since 2020 the government has signed more than a dozen loans with concessional lenders such as the World Bank, Brics bank and French and German development banks, which offer finance at far cheaper rates and easier terms than those available on international capital markets.
But that “non-marketable debt” is still hardly a quarter — at most — of the government’s foreign currency debt, which itself is under 11% of the government’s total debt of R5.6-trillion at end-March, and rising.
Every bit counts, but the World Bank’s $1.5bn (R27bn) will go only a small way towards the nearly R590bn the government needs to borrow just in the current fiscal year. The bulk of that will come from the domestic capital market, where the Treasury auctions billions of rand of bonds and treasury bills to banks, pension funds and other domestic and foreign investors each week.
The problem — as the finance minister has pointed out many times — is not so much the absolute size of government’s debt as the cost of servicing it. And that’s not just about the large quantity of debt that has to be serviced. It’s also about the interest rates investors demand in return for lending to the government, particularly long term.
The government loves to borrow long term: the average maturity of SA’s debt is one of the longest in emerging markets at almost 11 years; the average maturity of the foreign debt is over 13 years. Given investors’ uncertainty about what SA’s economy, public finances and politics might look like in 20 or 30 years’ time, they demand far higher yields (or interest rates) on the government’s long bonds than on short term borrowing such as treasury bills.
The cost of capital for African countries is a hot issue this year, with SA putting it high on the agenda for its G20 presidency. But SA’s debt cost plight doesn’t much resemble that of its neighbours. It is fortunate to have a well-developed domestic capital market, which not only means the government doesn’t depend on foreign borrowing as others do but also helps SA get better credit ratings than it otherwise might.
The cost of capital for African countries is a hot issue this year, with SA putting it high on the agenda for its G20 presidency. But SA’s debt cost plight doesn’t much resemble that of its neighbours.
The international financial institutions and multilateral development banks whose finance the government rebuffed until 2020 are also keen to lend now, especially given that SA is a better credit than many more distressed countries.
So, tapping the World Bank and other concessional lenders is one way the National Treasury has sought to reduce the cost of financing the government’s borrowing requirement. Another is to reduce the borrowing requirement itself by tapping the unrealised profits on the gold & foreign exchange contingency reserve account (GFECRA) — another hot topic, with the Bank and Treasury crunching the numbers to see whether the jump in the gold price and the value of SA’s gold reserves allows for more money to be released to the government, over and above the R150bn agreed on last February. The technicalities of the GFRECRA transfer also serve to increase the government’s short-term borrowing, while reducing the long-term requirement.
That’s a third, more durable way in which the government can and must lower its borrowing costs — by shifting its debt issuance strategy over time towards cheaper, shorter-term debt, which now makes up less than 15% of the total. Many bond market investors support a shift. The Bank has recently published estimates of how much could be saved with shorter maturities and a lower inflation target. And bizarrely perhaps, one politician who called the Treasury out in parliament on its debt management strategy is the MK party’s Brian Molefe, who headed up that arm of the Treasury in the early days before he went rogue.
A more fundamental question about the concessional and GFECRA financing is do they help the government’s fiscal consolidation efforts by reducing debt costs — or do they simply let it off the consolidation hook by helping it borrow more rather than rein in spending? That’s an issue politicians might consider.
• Joffe is editor-at-large.
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