Gov­ern­ment should use its cash

More bor­row­ing un­nec­es­sary

Finweek English Edition - - Economic Trends & Analysis - GRETA STEYN gre­tas@fin­

WHEN FOR­MER Fi­nance Min­is­ter Trevor Manuel un­veiled a bud­get deficit of 3,8% of gross do­mes­tic prod­uct in Fe­bru­ary this year, economists said the Bud­get was ex­pan­sion­ary. Most thought Manuel was sail­ing fairly close to the wind, as a Bud­get deficit of 3% of GDP had come to be seen as the “safe” level. But now it’s clear South Africa will prob­a­bly see a deficit of around 5% of GDP this fis­cal year.

Of course, that 3% bench­mark has been smashed to smithereens world­wide, with ma­jor economies such as the United States and Bri­tain rack­ing up dou­ble-digit deficits. Given the global back­drop, SA is still looking very healthy in­deed. But that doesn’t mean we shouldn’t be care­ful. Af­ter all, dif­fer­ent rules seem to ap­ply to emerg­ing mar­kets.

The trou­ble for SA’s Bud­get is that the “golden era” of growth – which av­er­aged 5% be­tween 2004 and 2007 – is well and truly over. Manuel bud­geted for a growth rate of 1,2% for this cal­en­dar year but most economists now ex­pect the econ­omy to shrink by around 1,5%. That’s a big swing, which has ma­jor im­pli­ca­tions for rev­enue.

Eco­nomic growth is the key to rev­enue and in the hal­cyon years Gov­ern­ment racked up ei­ther tiny deficits – too small to mat­ter – or small sur­pluses. SA Re­serve Bank fig­ures – which are cal­cu­lated on a cash flow ba­sis – show Gov­ern­ment recorded a deficit of 0,1% in the fis­cal year ended March 2006 and sur­pluses of 0,8% and 0,9% in 2007 and 2008.

GDP is the key to rev­enue, be­cause it’s the sum to­tal of all ac­tiv­ity in the econ­omy. All do­mes­tic spending – which leads to VAT col­lec­tions in the case of re­tail – form part of GDP. Com­pa­nies’ prof­its de­pend on eco­nomic ac­tiv­ity and the cor­po­rate tax take in turn de­pends on cor­po­rate prof­itabil­ity. If the econ­omy shrinks, it stands to rea­son rev­enue will also shrink. That then leads to a big­ger short­fall be­tween spending and rev­enue – that is, the Bud­get deficit.

The way Gov­ern­ment makes up the short­fall be­tween spending and rev­enue is through bor­row­ing. But that isn’t the only bor­row­ing Gov­ern­ment does in a fis­cal year. In lean years with no ex­tra rev­enue around Gov­ern­ment rolls over – re­fi­nances – bor­row­ings from pre­vi­ous fis­cal years that fall due in the cur­rent fis­cal year. That means that, with a sig­nif­i­cant deficit, there’s much de­mand for ex­tra fi­nance from the cap­i­tal mar­ket.

Manuel bud­geted for to­tal fi­nanc­ing of R90bn this fis­cal year – mas­sively up from the low level of fi­nanc­ing of R19,9bn it bud­geted in the pre­vi­ous fis­cal year, or the net re­pay­ment of debt of R15bn in the fis­cal year be­fore that.

But that’s just looking at Gov­ern­ment, the prov­inces and other en­ti­ties re­lated to cen­tral Gov­ern­ment. When the pub­lic sec­tor as a whole is looked at, the pic­ture changes even more dra­mat­i­cally, as Eskom and Transnet are in the midst of ma­jor bor­row­ing pro­grammes of their own. In the cur­rent fis­cal year the pub­lic sec­tor bor­row­ing re­quire­ment (PSBR) is bud­geted at more than dou­ble the pre­vi­ous fis­cal year at around R186bn. That means a mas­sive in­crease in de­mand for cap­i­tal from the bond mar­ket.

That’s set to in­crease fur­ther, be­cause Gov­ern­ment’s rev­enue will fall short of pro­jec­tions. The ques­tion is: How big will new Fi­nance Min­is­ter Pravin Gord­han’s headache be? From com­ments from Trea­sury of­fi­cials re­ported in the me­dia, not so big – only R8bn, which in the con­text of a bor­row­ing re­quire­ment of R186bn is small change.

But it could be worse, as Gord­han may fol­low Manuel’s lead in be­ing too op­ti­mistic about GDP un­til the very end. Still, the cap­i­tal mar­ket has al­ready fac­tored in ex­tra bor­row­ing.

How­ever, in the fis­cal years ahead Gov­ern­ment is go­ing to bat­tle to get its bor­row­ing re­quire­ment down, as GDP growth won’t reach the lev­els of the golden era over the medium term. And the more Gov­ern­ment bor­rows, the more in­ter­est it has to pay, leav­ing less money for so­cial and in­fra­struc­ture spending.

A ma­jor ques­tion that arises is why Gord­han, like Manuel be­fore him, doesn’t use the R66bn in “ster­il­i­sa­tion de­posits” Gov­ern­ment has at the Re­serve Bank in­stead of bor­row­ing more. That R66bn was raised be­cause Gov­ern­ment con­tin­ued bor­row­ing in fis­cal years when it was in sur­plus and ended up with mas­sive cash bal­ances.

It con­tin­ued bor­row­ing in those years be­cause it wanted to drain cash out of the money mar­ket, which was be­ing flooded with rand as the Bank bought US dol­lars in ex­change for rand to build up its for­eign ex­change re­serves. But there’s no rea­son now to be wor­ried about adding to the money sup­ply and that cash is ly­ing idle at SA’s cen­tral bank while the mar­ket – need­lessly, be­cause that cash is there – wor­ries about ex­tra bor­row­ing.

How big will the headache be? Pravin Gord­han

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