South African Finance Minister Trevor Manuel said on Wednesday that he was once given a T-shirt by an NGO that carried the slogan “Debt sucks”, and this was a sentiment that he shared.
“What is good for the individual should be good for the state and that sentiment has informed our budgetary process over the past decade. When we entered government it pained us that debt service consumed as much as education, and we set about changing that,” Manuel told a media briefing prior to delivering the Budget.
This process of reducing debt service costs was achieved by firstly cutting the fiscal deficit to gross domestic product (GDP) ratio from more than 7% in 1994 to only 1,1% in 2002/03.
The second leg of the debt service reduction strategy was to focus on cash management, so that the amount of cash that did not earn interest was reduced from R5-billion in 1995 to only R100-million currently.
The third leg was to improve the credit worthiness of South Africa, as reflected in the credit ratings assigned by the international credit agencies.
Standard and Poor, for instance, has increased South Africa’s rating by four notches from a speculative grade BB to an investment grade BBB with positive outlook.
A better credit rating means lower interest rates and hence lower debt service costs. The premium charged on South African government debt relative to German government debt, for instance, has been cut to a fifth of its launch premium from 250 basis points in October 1999 to only 52 basis points currently.
The fourth leg was to reduce inflation, which in turn would reduce interest rates and debt service costs. The annual average consumer inflation rate has been cut from 8,7% in 1995 to an expected 2% this year. This has seen the prime rate drop from a peak of 25,5% in 1998 to 11,5% currently, while the capital market yield has fallen from more than 20% in August 1998 to near 9%.
The combination of all these factors meant debt service as a percentage of GDP has fallen from a peak of 5,7% in 1998/99 to 4,1% in 2002/03 and a projected 3,6% in 2006/07.
The attitude that debt sucks is pervasive within “Team Finance”, and Treasury officials in discussions prior to the Budget reiterated that reducing debt service costs was the number-one priority, followed by other considerations such as risk, price and providing a liquid capital market. That is why the average maturity of government debt has been reduced from 8,8 years in March 2001 to an expected 8,1 years in March 2004.
It is also one of the reasons why South Africa has not rushed to market with a large long-term bond like its emerging market peers such as Brazil and Mexico. In the first six weeks of this year, emerging market governments have already issued $17-billion in bonds, but South Africa will only come to market with a $1-billion bond in either March or April. — I-Net Bridge