Ninety One warns about SA debt
• SA may have to borrow an average of R572bn a year for next eight years, pushing total debt to about 95% of GDP
The government will have to spend almost a quarter of its tax revenue to service interest payments on its ballooning borrowing requirements over the next eight years, putting the nation’s debt “on the cusp” of being unsustainable, says Ninety One. The asset manager forecasts SA will have to borrow an average of R572bn a year for the next eight years.
The government will have to spend almost a quarter of its tax revenue to service interest payments on its ballooning borrowing requirements over the next eight years, putting the nation’s debt “on the cusp” of being unsustainable, says Ninety One.
The Cape Town-based asset manager forecasts SA will have to borrow an average of R572bn a year for the next eight years, pushing total debt to about 95% of GDP and forcing the government to use about 24% of tax revenue to meet interest payments over that timeframe.
Ninety One’s forecast is based on spending projections outlined in finance minister Tito Mboweni’s medium-term budget policy statement in October and compares with a previous interest payment bill hovering between 12% and 14% of tax revenue from 2017 to 2019.
“[More than] R570bn for the next eight years is a pretty monumental task — that’s very close to indigestion,” says Peter Kent, a fixed income portfolio manager at Ninety One. “The mediumterm budget scenario is pretty much on the threshold of what is sustainable. Much more than that [and] the bond market is going to struggle.”
The economic impact of Covid-19 has sparked the worst economic contraction since the
Great Depression with the Treasury now forecasting that the economy shrank 7.8% in 2020. That contraction cut tax revenue, forcing the government to increase borrowing to meet its spending requirements.
While that has rapidly lifted the fiscal debt burden to 81.8% of GDP, up from 63.3% in 2019/2020, Mboweni has said he wants to stabilise SA’s debt at about 95% of GDP by 2025/2026, warning that the country could face a fiscal crisis should its debt exceed 100% of GDP.
Reserve Bank deputy governor Fundi Tshazibana said on Thursday that the bank regards a debt-to-GDP level of 60% as sustainable under normal circumstances, but that in a crisis it is understandable that one might deviate from that level. She said it would be important to monitor the Treasury’s debt projections to see if SA debt returns to this more sustainable level.
Ninety One estimates that SA borrowed about R780bn in the past fiscal year to cope with the impact of the pandemic, up from approximately R300bn the previous year. Kent says SA’s comparatively high interest rates act as a “binding constraint” and prevent it from borrowing as much as developed markets, such as the US, UK and Japan, where borrowing costs are close to zero.
Kent projects that if the government experiences a “spending slip” that causes annual borrowing to increase to R595bn for the next eight years, the country’s interest payments on debt would climb to 28% of revenue. If economic growth underperforms current Treasury projections, further eroding tax receipts, then annual borrowing requirements could jump to as high as R730bn, according to Ninety One’s projections.
That would push interest payments to 32% of annual revenue. Further expenditure misses or low growth could lift annual borrowing to as high as R864bn a year requiring 36% of tax revenue to be used for interest payments.
“That is unsustainable — the bond market will not be there,” says Kent. “You can imagine the social upheaval in that sort of environment.”
Still, Kent says a debt default is “completely avoidable” and “highly unlikely”, particularly if SA can boost economic growth to 3% a year or higher as it would eliminate the need for the government to keep borrowing more each year to fund expenditure. Ninety One projects that if SA can sustain an economic growth rate of 3% a year, then the government’s annual borrowing requirement will drop to R337bn requiring 21% of tax revenue to meet interest payments.
“We need to grow at about 3% and the problem is solved quite easily,” says Kent. “We need to those growth reforms — they need to start coming through.”