In the wake of rising public debt levels, weak economic growth and lower-than-expected tax collection, South Africa has so far avoided a downgrade of its credit worthiness from Moody’s Investor Services.
The risk to the country’s investment-grade credit rating has, however, become more pronounced, with government borrowing increasing 21.4%, to R407-billion, this year. By next year, borrowing is expected to reach R497.5-billion.
Adding to this, Finance Minister Tito Mboweni said in his budget speech on Wednesday that debt is projected to be R3.56-trillion, or 65.5% of gross domestic product (GDP), by the end of 2020-21.
The government’s debt repayments are set to hamper plans for spending on crucial social items such as infrastructure, social services and health. Each of these services are necessary to spur the country’s growth and development.
The treasury said this sharp increase is a reflection of the country’s worsening fiscal position, and “an increase in domestic bond redemptions”.
Only Moody’s rates the country’s debt at investment grade. This may change come March 27 when the ratings agency is scheduled to announce its decision on the country’s creditworthiness.
In its last review of South Africa’s creditworthiness, Moody’s downgraded the country’s sovereign rating to negative from stable and further put it on notice for a downgrade to junk.
Moody’s said Mboweni’s 2020 budget speech should set out a programme of action that will reduce South Africa’s unsustainable debt burden; enhance the economic growth necessary to tackle unemployment; and, lastly, defend the worthiness of our investment-grade credit rating.
A significant portion of South Africa’s debt is still domestically dominated, which has shielded the government from volatility in debt costs arising from fluctuations in the exchange rate.
The increased borrowing costs, however, have been as a result of higher yields, especially on longer-dated domestic bonds, the treasury said.
The high cost of debt
The government does not expect its debt to stabilise over the medium term because debt, and the servicing of debt, will continue to rise. Debt-service costs now absorb 15.2% of main budget revenue. In 2019-20, debt-service costs were revised upwards by R2.8-billion because of the higher borrowing requirement.
Loan debt is estimated to increase from R3.18-trillion (61.6% of GDP) in 2019-20 to R4.38-trillion (71.6% of GDP) in 2022-23.
Analysts have said that this current debt trajectory is unsustainable, and will have to be curbed by reducing expenditure, improving the financial positions of state-owned enterprises, and increasing revenue.
So far, the government has managed to service its debt in a prudent and efficient manner. This, however, may be threatened by weakened public finances and a poor economy.
Ratings agencies have expressed their concerns about the country’s low economic growth, fiscal deficit and increasing liabilities. So far, however, only two of the three major agencies have downgraded the country’s credit ratings.
The risk factors to maintaining the current investment grade include the widening budget deficit that would be increased by continued bailout of state-owned enterprises (SOEs), which could increase debt and borrowing costs; unanticipated increases in inflation or a depreciation of the rand; and further downgrades of the country’s credit ratings by agencies.
If downgraded, South Africa would be excluded from the FTSE World Government Bond Index, which would force some institutions that have not already sold off the country’s debt to do so. This could lead to an increase in already high borrowing costs.
Mboweni told journalists at a closed media briefing before tabling the budget on Wednesday that he does not believe Moody’s will downgrade the country.
He said that, although the rating agency would see from the 2020 budget that the country’s deficit is expected to be at 6.3% and that ailing SOEs continue to require financial support from the treasury, the government is determined to turn the situation around.
“They may give us a bit of a klap because we have already klapped ourselves. The issues that they raise are, however, important because we have to get our house in order and it’s going to be a difficult process,” Mboweni said.