Deeper debt trap looms as all eyes turn to Tito

Budget will reveal if the savings needed to stabilise debt burden can be achieved

The government has been borrowing even more in the market than it planned for in June, with economists projecting its total borrowing requirement for the next three years could exceed R2-trillion, driving up the cost and pitching SA deeper into a debt trap.

Finance minister Tito Mboweni presents his medium-term budget policy statement (MTBPS) on Wednesday, when he is expected to provide an update on whether he can achieve the total R400bn of savings he said in June would be needed to stabilise the government’s soaring debt burden over the next three years.

Even with the savings, the government would still have needed to borrow R777bn in the current fiscal year — almost double the number it projected before the Covid crisis forced the economy into a deep recession, slashing tax collections, adding to the spending bill and driving up the deficit and the borrowing requirement.

The government’s weekly issuance on the bond market has been running ahead of requirements since July as it takes advantage of investors’ appetite for the high yields at which long-dated bonds are trading — yields that reflect concerns about SA’s ailing public finances. Investors have been making the most of a “noncompetitive” option which allows them to double their purchases of bonds at the government’s weekly auctions.

But it’s not clear how long the pace can be sustained, and markets will watch the MTBPS for signals on whether the government will be raising or reducing its funding requirement.

“Reducing issuance would send a very positive message to the bond markets … It would indicate a commitment by National Treasury to stick to the MTBPS — rather than retaining optionality for future issuance increases,” said Ninety One’s Nazmeera Moola and Sisamkele Kobus in a note on Friday.

BNP Paribas senior economist Jeff Schultz said an ample and supportive global liquidity and funding environment would continue into 2021 and “real yields on offer in South Africa are some of the healthiest in the world, which should continue to bode in favour of solid participation in South African government bonds”.

But others believe the Treasury will want to tap markets for as much as it can now because next year could get a lot tougher, especially given febrile international markets and waning appetite among foreign investors for

SA’s domestic bonds.

“SA’s ability to absorb negative surprises is now wafer thin,” said a foreign fund manager. “The fiscal space to make all this work is becoming very narrow and markets won’t give South Africa the benefit of the doubt.”

The government has for the first time turned to international financial institutions, including the International Monetary Fund and New Development (Brics) Bank for concessional financing, raising about $5.3bn (about R86bn) so far. But this is one-off funding that is not expected to provide more than a small part of what’s required, with the rest coming from the bond and treasury bill markets and cash the government has on hand.

Mboweni’s projected savings, which included R230bn of unidentified cuts to government spending along with a R160bn saving on curbing the public sector wage bill, were key to an “active scenario” that would see debt climb to 87% of GDP before levelling off — as opposed to a “passive scenario” in which the debt ratio would climb to 140% and the cost of servicing that debt would consume almost a third of all tax revenue within a few years.

But economists question whether those overambitious spending cuts can or even should be achieved, given the political contestation around them and the potential of the cuts to dampen SA’s economic recovery.

Mboweni will also have to revise down his projections for the economy, which the Treasury in June saw contracting by 7.1%. But the latest Beeld consensus forecast now sees a contraction of 8.4% for this year, reverting to growth of 3.6% next year.

Lower growth could mean an even wider revenue shortfall than the R304bn projected in June, and a higher deficit — which could mean a higher borrowing requirement.

RMB economist Kim Silberman expects the main budget deficit to be revised to 15%, from the 14.6% Treasury forecast in June,

She estimates the government’s borrowing requirement for the current fiscal year will end up at R790bn, including debt redemptions, with a further R630bn next year and R675bn the following year.

June’s budget projected R480bn would be raised in fixed-term domestic bonds this year, and since July issuance at the weekly auctions has run at an average R6.6bn a week, with a further R3.5bn of “non-competitive’’ issuance.

In addition, the government has lifted its issuance of short-dated Treasury bills to R12.9bn a week, as it tries to cut borrowing costs by taking advantage of shorter-term interest rates now being much lower than longer-term rates.

That’s reflected in a yield curve that is unprecedentedly steep, with government 10year bonds trading at yields of 9.3% and 30year bonds at 11.5%, reflecting concern about SA’s growth and fiscal trajectories, while shorter-dated money can be got at 3.5%-4%.

Economists caution that the government’s cost of borrowing could go even higher if the supply of bonds runs ahead of demand, especially given the exit by foreign investors, whose holdings of SA’s local currency government bonds have fallen to just 29% of the total, from 37% in January.

Reducing issuance would send a very positive message to the bond markets Nazmeera Moola and Sisamkele Kobus of Ninety One, in a note on Friday