While Finance Minister Tito Mboweni’s budget has emphasised the need to arrest the country’s rising debt levels, there are concerns that if they continue to increase, this will expose the banking sector — which has increased its share of government’s debt— to systemic risks.
Since last year, government bonds held by foreign investors fell by R8-billion in 2020 relative to an increase of R95-billion in 2019, which the treasury said is “reflecting concerns about sovereign credit risk and uncertainty around the pandemic”.
Due to this shift, domestic financial institutions increased their holdings significantly, from 14.7% in 2019 to 22% in 2020. However, according to the treasury’s budget review, pension funds driven by the longer-term outlook reduced their holdings in response to increased short- and medium-term bond issuance.
Michael Sachs, adjunct professor at the University of the Witwatersrand’s Southern Centre for Inequality Studies, said that if there is an uncertain shock suddenly, it could rebound in the financial market. “In my view, it’s something to worry about. If the government does not restore sustainability to its finances, the danger of financial instability rises,” he said.
Sachs added that if debt continues rising and growth does not return, the danger of financial disorder becomes evident.
In a briefing held after the budget, treasury’s Tshepiso Moahloli said when they are looking at the market’s absorptive capacity, banks hold about R6.6-trillion in government bonds. In comparison, other nonfinancial sectors have at least R10-trillion.
However, she said, the “significant gross borrowing over the years is not sustainable, even if South Africa has a deep and liquid financial market”.
During the pandemic, the government increased its spending to support households, businesses and the public health sector. The government has increased its spending to a record of 41.7% of GDP compared with 29.6 % seen in 2008 and 2009.
This has widened the budget deficit from 5.7% in 2019-20 to an estimated 14% in the current financial year.
In the treasury’s briefing, the Reserve Bank governor Lesetja Kganyago said that the widening debt deficit means that the government was borrowing the entire savings generated in the economy in one year, raising the capital cost.
He said the rise in government debt crowded out private investment, which is the micro price that this economy has been paying.
“So do not cry and say that the economy is not growing because the government consumed the savings that were available,” he said. As it stands, the economy is projected to grow by 3.3 % this year, but it will moderate to 1.6% in 2023.
The gross borrowing requirement increased by R237.6-billion to R670.3-billion in 2020-21. However, the borrowing requirement is expected to decline to R541.7-billion in 2023-24 as the government reduces spending. Gross loan debt is expected to increase to R5.23-trillion by 2023-24 and stabilise at 88.9% of GDP in 2025 and 2026. The treasury predicts that the budget deficit will narrow from 7.5% of GDP in 2020-21 to 0.8% in 2023-24.
Herman van Papendorp, head of investment research and asset allocation at Momentum Investments, said that South African bonds were attractive to all South Africans because of their high interest.
But he said there was no need to worry about the government defaulting. He added that usually, when the debt of a country increases, the risk of holding bonds rises as well, but Mboweni’s budget was working to bring back the fiscal numbers.
Tshegofatso Mathe is an Adamela Trust business reporter at the M&G