A fiscal crisis: are we there yet?

The focus of the Medium Term Budget Policy Statement (MTBPS) was avoiding a fiscal crisis, but how will South Africans know if we are actually in a fiscal crisis? What is the key number we should all be watching for at which point we can say definitively: the fiscal crisis is upon us?

One absolutely undeniable definition of a fiscal crisis is when a country can’t honour its current debt obligations. South Africa is nowhere near that point, but Zambia, for example, just made this declaration recently and could default. Zimbabwe reached that point decades ago and has never emerged.

Apartheid South Africa hit that point in the mid 1980s, and it’s pretty cataclysmic. Suddenly, the government loses control over state finances, and lenders hold the whiphand – and it’s often exactly that, a whip.

The formal definition of a fiscal crisis is when the state can’t pay for a deficit created by the difference between its tax revenue and its expenditure. But when do you actually reach that point?

A fiscal crisis is often the result of another gloomy notion: a debt trap. Where it becomes impossible to contain the growth of government debt. Often this is because, as debt is accumulated, the cost of debt rises, so you end up in a situation where you’re forced to borrow progressively more just to pay off the debt already accumulated, accumulating more debt to pay off later.

Fiscal crisis lite?

It turns out there are degrees of fiscal crisis. Mamokete Lijane, fixed income macro strategist at the Absa Group, says you can find yourself in a “fiscal crisis lite” and it’s a problem because you can be in a fiscal crisis for a long time before the default happens. Lijane says this situation applies when government’s cost of borrowing starts to affect its ability to deliver services.

The MTBPS showed us how this was beginning to happen. One recent example is how government funded the business rescue of SAA. Normally, this egregious bail-out of our second-largest state-owned enterprise disaster would have been funded with debt. But increasing the level of debt was not available. Carol Paton writes in that the police and higher education ministries stood out as the biggest losers as the Treasury raided 41 departments to save SAA.

Limits on the ability to borrow rather than a hard stop is usually a result gap between the rate of economic growth and the rate at which government expenditure increases. South Africa has been watching that movie for almost a decade now. And then, the coronavirus pandemic accelerated the trend.

But what about the critical point of no return? Are we there yet?

Point of no return

Unfortunately, it’s harder to say definitively than it might seem. Lijane says one number the bond market often looks at is when debt payments reach 25% of total government expenditure.

As at the latest budget (June 2020) the Treasury estimated that gross national government debt is projected to increase from R3.26-trillion, or 63.5% of GDP in 2019/20, to R3.97-trillion (81.8% of GDP) in 2020/21. By the end of 2022/23, gross loan debt is expected to total R4.83-trillion, or 86% of GDP. The MTBPS pushed that up, and it’s expected to be 95% of GDP in 2024/25. Gulp.

That means the debt-service costs – just the amount necessary to pay off the interest on existing debt, will increase from R204.8-billion in 2019/20 to R236.4-billion in 2020/21, then to R301.1-billion in 2022/23. That’s 21.5% of expenditure, rising to 22%.

Lijane says a bunch of factors tend to extend South Africa’s fiscal runway, helping explain why the bond markets are not, or not yet, in panic mode. Incredibly, the government is currently borrowing at more or less the same level as before the Covid-19 crisis.

Some we have heard before: because the bond market is very developed, the government borrows in local currency. That doesn’t happen in Argentina, and the consequences are painful. South Africa’s floating exchange rate also tends to act as a shock absorber.

It has a thumping great savings industry, much larger than countries of comparable size. Low and declining interest rates internationally also tend to boost local debt markets, increasing government’s fiscal runway.

As the MTBPS shows, government is now painted into a corner of its own making.