Currency market affected

THE medium-term budget policy statement badly disappointed the market in the rand and RSA bonds.

The rand subsequently lost about 3.3% of its dollar value and was nearly 4% weaker against other emerging market exchange rates.

This indicates rand weakness and additional South African-specific risks at work.

South Africa’s cost of raising funds for 10 years has risen by about 22 basis points, while five-year money has become 25 basis points more expensive for taxpayers.

The spread investors receive as compensation for the risk that South Africa may default on its dollar-denominated debt has risen by about 13 basis points.

Given that between now and 2020-21, South Africa will have to raise about R1-trillion to fund the growing deficit and roll over maturing debt, the budget statement has been a very expensive failure for taxpayers.

Furthermore, by weakening the rand, widening the risks to our credit ratings and the rand, and adding to the inflation rate, the prospects for faster growth have deteriorated.

Yet it is hard to understand why the statement was so poorly received.

It continued to commit the government to fiscal conservatism.

That taxes collected of R50-billion less than estimated in the February budget was widely signalled, as was the breach of the spending ceilings incurred to keep South African Airways alive.

Raising the budget deficit and the borrowing requirement rather than increasing tax rates makes good sense.

The Treasury may implicitly have conceded that raising income tax rates in February proved counterproductive.

Higher tax rates have not increased revenues and have in all probability discouraged growth. Raising income tax rates in the near future may have become less likely.

Strictly controlling state spending while selling government assets is the only way out of the debt and interest trap.

But privatisation on any scale appears as unlikely after the statement as it was before.

What then are the steps the government could immediately be expected to take that might raise confidence in the prospects for the economy?

Enough to encourage households to spend more of their incomes, and firms to add jobs and capacity to meet extra demands?

Confidence enough to lift growth rates closer to a highly feasible 3% rather than 1% a year?

What is essential is no less than a confidence-boosting conviction that the government is capable of ridding the country of the crooks who have gained destructive command of much of the economy.

It will therefore take more than a statement to improve the outlook for the economy to escape the stagnation that makes sound budgeting so difficult.

The gross borrowing requirement is projected to increase from R248.3-billion in 2017-18 to R333.5-billion in 2020-21.

Over the medium term, the gross borrowing requirement is close to R1-trillion.

The refinancing of Treasury bills with maturities of less than a year amounts to R1.6-trillion in the same period.

The government’s borrowing programme is underpinned by prudent benchmarks for refinancing, interest, inflation and currency risks, which ensure the debt portfolio remains well structured.

In response to the widening deficit, the state has adjusted its funding strategy but will remain within its benchmarks. Adjustments include: ý Increasing Treasury bill issuance to use as bridging finance and fund part of the higher borrowing requirement;

ý Raising the amount of debt issued in weekly auctions for both fixed-rate and inflation-linked bonds; and

ý Increasing borrowing from global markets to pre-fund foreign currency redemptions in 2019-20 and to cover the government’s foreign currency commitments.