EDITORIAL: Local banks funding BIG is no small matter

In all the talk about a basic income grant (BIG), what gets overlooked is where the money is going to come from, even if the government is ready to throw caution to the wind.  

Proposals have been made suggesting options such as increasing taxes, something that would be a bad idea. SA already has one of the smallest tax bases for a major economy relative to the size of its population. 

There’s very much a consensus that the number of people who are in the top brackets for handing over money to the SA Revenue Service (Sars) has been shrinking in recent years, something that was acknowledged by some members of the presidential economic advisory council.

As far back as 2016, legal firm Webber Wentzel cited Sars data showing that about 1% of the population paid 60% of personal taxes. This will have got worse after the Covid-19 outbreak and lockdowns, which brought business failures and the loss of more than 1-million jobs.

Anecdotal evidence also suggests that there’s been an increase in emigration since the July 2021 riots and looting exposed a state that’s so weak it can’t do the most basic function — protect life and property. There’s also concern about a possible impact on taxpayer behaviour. This is a fancy way to say it could encourage more hard-pressed people, resentful of being asked for more, to find ways to avoid or evade taxes.   

Some say SA could just then borrow some more, despite a level of indebtedness that’s well above what’s regarded as the acceptable standard for emerging markets. Despite a recent improvement due to an unexpected bonanza from commodity prices, the IMF expects SA’s debt-to-GDP ratio to have hit 70% in 2021, while budget deficits should remain at historic highs of about 7% in coming years. That has to be funded

Perhaps the most important thing to consider is not so much the government’s willingness to borrow, but potential creditors’ propensity to give it cash. Ever since SA lost its last remaining investment-grade rating in 2020, foreign investors have become less willing to take on SA bonds, even at yields that are among the highest for major economies. Instead, it’s been borrowing more and more from local banks.The deepening of the so-called bank-sovereign nexus received a lot of attention in the IMF Article IV assessment of SA, though the lender was far from being alarmist about it. But it also said this link could “amplify” shocks to the financial system and the economy.Anyone who followed the European sovereign debt crisis from around 2010 will know what they are talking about. Banks with large holdings of “risk-free” government bonds in their balance sheets almost went down when sovereigns such as Greece and Spain faced fiscal crises, and the prices of the bonds they had issued crashed, pushing yields to levels not seen in developed markets.

Holdings of government bonds also expose banks to higher interest rates that reduce the value of the debt they hold, a clear and present risk now with global central banks tightening policy. The Reserve Bank isn’t unaware of the risks. Deputy governor Kuben Naidoo told a Ninety One webinar in August 2021 that policymakers were watching a development that has seen the proportion of sovereign bonds held by local banks reach about 20%, from 17% at the end of 2019. That share owned by foreigners has shrunk to just over 30%, from 43% in early 2018. SA’s banks, maligned despite having rescued the economy during the Covid-19 crisis, have staged an impressive recovery from the pandemic and remain one of the country’s few strengths.

But few people would believe they are strong enough to fund a BIG in perpetuity. SA’s priority should be to wean the state off bank borrowing. And you do that by growing the economy, with the increased tax take reducing the need for the government to borrow. Increasing social grants now would mean more borrowing just at a time when the government’s most reliable lender needs to turn the taps down, if not off.