SA could face long-term scarring of investor sentiment and job growth

SOUTH Africa’s sovereign debt costs rose immediately through the civil unrest in KwaZulu-Natal and Gauteng last month as the buyers of South Africa’s bonds demanded higher interest rates for the additional risk.

This was said by the National Treasury deputy director-general for economic policy Duncan Pieterse yesterday in a presentation to Parliament’s select committee on finance.

He said that while the interest rates on South Africa’s long-term bonds had reduced slightly since then, the unrest would undoubtedly have an effect on how much the government pays on interest in future, its fiscal stance, and how it spends the funds that are available to it.

He said the interest rate on South Africa’s 10-year bonds stood at 9.06 percent on July 9, but this rose to 9.16 percent by July 19.

The 10-year-long bond rate recovered slightly to 9.12 percent on August 22, in line with other emerging markets. A similar trend was seen in the 30-year-long bond rate, said Pieterse.

To provide an estimate of how much the government currently has to pay out in debt, Pieterse said debt servicing costs currently stood at R233 billion a year, versus R247bn spent annually by the Department of Health, and R219bn allocated by the government on spending on peace and security.

He said the rand-dollar exchange rate had appreciated in the beginning of the year to June, relative to other emerging market currencies, mainly because of the big impact of rising commodity prices on the economy.

However, between July 9 and July 19, the currency depreciated 2.4 percent, while other emerging market currencies were relatively stable through this period.

Pieterse said only 6 percent of the small businesses impact by the unrest had since reopened – 89 percent of the businesses impacted by the unrest were small businesses.

He said small businesses were the most vulnerable to closure from an event such as unrest, because they often did not have insurance or large cash reserves, and the low level of re-openings did not bode well for employment prospects going forward.

Forty-four percent of the businesses impacted by the unrest had closed temporarily.

“We are concerned about the potential scarring (longer term) effect on employment and investor sentiment,” he said.

He said the impact of the unrest, and threats of further unrest, would impede the positive economic growth momentum of this year that had been generated by the rising commodity prices and global economic recovery.

At this stage, and while forecasts would change by the time of the Medium Term Budget Policy Statement in October, the National Treasury expected the unrest would shave off 0.7 to 0.9 percent of this year’s gross domestic product.

Finance Committee chairperson Yunus Carrim said his belief was that civil unrest might flare up again due to structural inequalities in South Africa, and a social fund would go some way to reducing these inequalities.

“In countries of huge inequalities, inequalities don’t create the conditions for sustainable growth,” he said.