Simon Segal
One of the key components of Finance Minister Chris Liebenberg’s Budget is to address fears around the budget deficit and government debt.
These blight an otherwise impressive economic record that boasts the most buoyant growth, lowest inflation, largest net capital inflows and most sizeable fixed investment in two decades.
Liebenberg’s numbers for the 1996/97 fiscal year move in the right direction, albeit slowly. The deficit amounts to 5,1% of gross domestic product (GDP) against 6% in 1995/96 (5,5% if transfers to the Central Energy Fund are excluded). The total debt comes to 55,6% of GDP (56%).
Government’s deficit is well above the 3% mark that influential institutions such as the International Monetary Fund and World Bank consider stable.
This is not about ideology or economic orthodoxy. Even a 5,1% deficit figure is a major turn-off to potential investors, both domestic and foreign.
In a world where fiscal prudence is the trend, globally integrated markets judge economies harshly by voting with their money. Liebenberg talks about reducing the deficit by 0,5 percentage points in the next few years.
South Africa’s government debt is just below the 60% mark that these institutions consider prudent before a country gets caught in a so- called debt trap. But the trend in South Africa is ominous — in 1980 to 1981 government debt was 30% of GDP.
The interest bill (R34,4-billion) amounts to 20% of total spending (18% in 1995/96) and tax revenue is up from 24,6% of GDP in 1995/96 to 25,1%.
The deficit totals R28,8-billion (revenue of R145-billion less expenditure of R174- billion).
If loan redemptions are included the gross borrowing requirements for 1996/97 amount to R45,1-billion against R38,4-billion in 1995/96.
This will be financed from short-term loans (R3-billion), government bonds (R36,6-billion) and foreign loans (R2,5-billion).
None of this should prove a problem and put pressure on interest rates, but foreign borrowing becomes expensive when the rand depreciates. The 100-million bond now costs R620-million to redeem compared with R540- million when it was issued earlier this year. In 1995/96, R1,8-billion was raised. In addition to the pound, there was a Japanese yen issue that raised around R1,2-billion.
In the local bond market, the bulk of the funds will be raised in the R153 (matures in parts in 2009, 2010 and 2011), a new 2006 stock and reopened R177 (2007) and R175 (2002) bonds. The R157 (maturing over 2015, 2016 and 2017), which has raised some R18-billion from the Public Investment Commission, will also be put into the market. The bond market gave the final favourable verdict — rates on the R150 fell from 15,48% just before the budget to 14,88% directly after Liebenberg spoke.
Longer term investors might take a more sombre view. First, Liebenberg’s figures have to be trusted. Last year a deficit of 5,8% was budgeted for, or R29-billion. It ended up at 6% (R30-billion).
The main factors behind this larger deficit are serious provincial overspending and shoddy former homeland finances, expenditure of votes from previous years brought forward into this fiscal year, the removal of import surcharges and lower value-added tax revenue owing to reduced inflation.
The major economic problems with a large public debt include “crowding out” private investment, adding to inflationary pressures, impairing incentives to innovate and invest and undermining monetary policy and hence putting pressure on interest rates.