To what extent is SA’s public debt sustainable?

IF YOU go by the maxim of James Madison, the fourth US president, that “a public debt is a public curse”, then South African Finance Minister Enoch Godongwana’s latest $3.5bn (about R53bn) addition to the national debt burden assumes a potentially sinister context.

In Q1 2022, the National Treasury borrowed $750 million from the World Bank, through a development loan in February to boost the Ramaphosa government’s post-Covid economic recovery plan, complemented by the two-tranche $3bn international bond issuance last week, this time “to fund the government’s foreign currency commitments”.

Madison was alluding to unsustainable public debt, which many critics argue “is helping to keep too many poor countries and poor people in poverty”.

Debt metrics is subject to as much volatility as other macroeconomic and fiscal data, given the evolving nature of global economic and financial dynamics, especially in times of multiple uncertainties – post-pandemic impacts, burgeoning stagflation in many global markets and the disruptions on energy and commodity supplies and pricing due to the war in Ukraine.

This month, Moody’s Investors Service upped its outlook for South Africa, from negative to stable, based on better-than-expected fiscal performance, especially in higher tax revenues.

Given that South Africa is in the middle of a cost-of-living crisis and despite the better revenue collection scenario, to what extent is the public debt sustainable?

Jan Friederich, the head of EMEA Sovereign Ratings at Fitch Ratings, is giving Team Godongwana the benefit of the doubt but with a heavy burden of caveats.

“South Africa’s debt is sustainable,” he explains. “We would not rate it BB, if it was not. However, debt challenges remain substantial and the key challenge and rating sensitivity we see is whether the government will be able to sustainably halt, and potentially reverse, the long-term upward trend in government debt.”

The standout takeaway, says the International Monetary Fund, is that the global debt burden is reaching “dangerous” levels at 256% of GDP at the end of 2020, and “a global co-operative approach is necessary to reach an orderly resolution of debt problems and prevent defaults”.

Friederich remains sanguine about the inherent structural challenges of the country’s sovereign debt profile and any room for policy slack due to the motley of demands on the Treasury in the National Budget 2022. One core debility is the exceptionally high debt-servicing interest-to-revenue ratio.

“South Africa’s government interest-to-revenue ratios,” he maintains, “are very high relative to advanced economies, and even high in comparison to BB-rated peer economies.

“To some extent, this is offset by a particularly sound debt structure, but we remain concerned by the fact that debt has continued to rise.

“South Africa benefits from the surge in commodity prices that is also boosting fiscal revenues. At the same time, longer term socio-economic pressures, particularly high inequality and exceptionally high unemployment, put pressure on the government.”

Public debt can be beguiling, especially if debt management offices are not effectively resourced, do not have the requisite institutional capacity or are beholden to political masters.

Short of debt write-offs, countries often end up in a “debt trap” to international agencies such as the IMF, or sovereign debtors such as China, through incurring further debt to service the previous debt. Sri Lanka, which is on the verge of defaulting, has already begged China to reschedule $5bn of debt.

Kenya has just tabled a $28.69bn spending plan for 2022/23 to accelerate post-pandemic recovery. With government debt close to reaching the $78.26bn ceiling, the National Treasury wants to amend the Public Finance Management Act to raise the debt ceiling to allow for even more borrowing. The law it seems is now the last refuge of the politician/debtor.