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SA at risk of a public sector debt trap

The country’s assets may well remain cheap without concerted action to address the economy’s structural problems.
Has the country entered a twilight zone? The state of public finances is increasingly pointing to such a situation. Image: Shutterstock

In recent years, South African investors facing a struggling local stock market have at least enjoyed some respite in local bonds. The FTSE/JSE All Bond Index is up 7.3% per annum over the past five years to the end of July, compared to the 4.7% annualised return from the FTSE/JSE All Share Index.

With the deterioration in South Africa’s fiscal position, however, the outlook for local government bonds is growing less certain.

“I don’t think cash and bonds are a safe hiding place, even though they are tempting,” said Jacques Plaut, co-portfolio manager of the Allan Gray Balanced fund during the Independent Insights webinar this week.

“If you are buying a bond, you are lending money to the South African government, and the first question you ask when lending someone money is if they can pay you back.

“Over the last five years, the odds of that have decreased quite a lot.”

After years of decline, the Covid-19 crisis has now pushed government finances to a precarious point.

Debt trap

“The deterioration of the South African fiscal position is signalling the possibility of a public sector debt trap,” Futuregrowth Asset Management said in a note. “Such a debt trap is considered to arise from an unsustainable fiscal position. In turn, an unsustainable fiscal position implies a situation where the increase in outstanding public sector debt can no longer be slowed by higher taxation and/or a decrease in discretionary expenditure (total expenditure excluding debt servicing costs).


“A failure to turn the tables will require the issuance of more debt in order to finance the repayment of maturing bonds and the payment of interest on outstanding debt, thereby forcing government into a catch-22 situation. Our analysis regarding the state of public finances increasingly points to a situation where the country has entered this twilight zone.”

This is not just a risk to bondholders.

“Additional red flags are raised in a scenario where the average interest rate payable on its outstanding debt exceeds the nominal rate at which the economy is growing,” said Futuregrowth.

“Failure to restructure the economy in general and the role of government specifically, for instance by cutting current expenditure sufficiently to turn the ship, will increase the probability of this debt being monetised.”

That would have implications for asset classes across the board.


This uncertainty only adds to the already challenging investment environment.

“It’s very difficult to call markets,” said Iain Power, CIO of Truffle Asset Management and co-portfolio manager of the Nedgroup Investments Balanced fund. “There are a lot of exogenous factors at play.”

What would undoubtedly make things clearer is some definitive action from the government. Nobody doubts that there is an appreciation of what is ailing the economy, or what needs to be done about it.

What is lacking is action.

Sandile Malinga, co-portfolio manager on the Prudential Balanced Fund, pointed out that it’s been 10 years since the National Development Plan was adopted. Yet it remains almost entirely unrealised.

“In my opinion we have enough plans,” Malinga said. “The most important thing right now is for the government to start with something. Pick any of the things that need to be done and just deliver them.

“We live in the real world. No one ever imagines all of the reform initiatives that need to be undertaken will be perfectly executed. But if you don’t shoot for something you miss 100%.”

Mean reversion

Even though many South African assets – across equities, bonds and listed property – look optically cheap, they may well remain so without concerted action to address the structural problems in the economy.

“You need some of these things to happen to unlock that value and get some mean reversion,” said Power. “The data at the moment suggests indecisiveness and inaction. We are fast approaching the point where fiscal demands crowd out productive capital expenditure.”

What investors are looking for is the structural reform that will turn this around.

“These are the things we want to see addressed,” said Power. “That will then give the opportunity for South African investors to be part of a more inclusive economy, where there is value creation for all and ultimately results in a brighter future.”

Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.


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The JSE I believe does not reflect the fundamentals on the ground and there should be a huge correction on the cards. I think you will find that the downturn has not even really started yet. The SA tax base is too small and is mainly made up of HNW individuals paying the majority of taxes – I do believe that a lot of these taxpayers will have finally realized from the lockdown and some truly insane regulations that they do actually live in Africa where lives are lived according to the whims of the the ruling party. Many during the lockdown will have had the time to polish their exit plans and over the next 2-5 years there will be a mass exodus of these taxpayers. It must be realized that these are not just taxpayers but are the type of people who are globally mobile, employers, spenders and exactly the type of people that will be an asset and welcomed to any country they relocate to – They are the contributors to society not the takers. Looking at the proposed ANC policies – Prescribed assets, wealth tax, extra municipal taxes, quantitative easing, EWC, NHI, national basic income grant and increased racial labour quotas there is very little for these people to stay for. Unemployment, it has been estimated, will increase to 50% and crime will increase proportionally (It has to). This countries tax revenue will never exceed what it was last year (in real terms) and unemployment will soar in future (the money for the ANC’s policy wish list can only come from increased taxes of a small tax base or increased borrowing) – in short the fiscal cliff has been passed and the IMF loan will not be repaid without borrowing more from somewhere else at higher interest rates – Currency depreciation and soaring unemployment are a given and no matter who rules this will be the outcome. I have not even mentioned corruption or Eskom (No power = no growth) – if you can, get out, or get your money out! The question to ask yourself if you hesitant is “If I had money invested offshore – Would I bring it back to invest in this country?

Institutions and individuals who buy SA government bonds are lending money to Ace Magashule. If they are not willing to lend their own money to him directly, why are they using their clients’ money to lend to him indirectly? Luthuli House is morally and financially bankrupt. Not only are the rulers not credit-worthy, but they are also not even trust-worthy.

According to what kind of logic can a country with a morally bankrupt leadership escape financial bankruptcy?

I have invested around 20% of my living annuity in a bond fund, which is not subject to tax on the investment returns earned within the LA. This has provided reasonable return all things considered. I understand the risks, this is why I keep 60% of LA invested in international feeder funds. I also have around 70% of my discretionary portfolio invested directly offshore. South African bonds do offer higher returns vs. cash which is important for fixed income investors like pensioners.

“There is nothing new in the world except the history you do not know”. Harry S Truman.

The future is only uncertain for those who cannot identify, or do not understand, the current prominent factors that determine the future. Human action is the string that ties the future to the present and creates a bond between the future and history. Humans act according to their beliefs, cultural norms, mindset, cognitive ability and their socio-economic position.

Maslow’s Hierarchy of Needs describes how the needs of rational people differ from one level to the next. This scientific work describes how humans think and act according to the reality that they find themselves in. People at the bottom of Maslow’s scale, whose basic physiological needs are unfulfilled, do not care about status, recognition, freedom or economic issues. They do not care about the “higher values” like the rights of property owners and a sustainable government. When you are uncertain where your next meal will come from you don’t care about logical reasoning, you don’t learn lessons from Zimbabwe or Venezuela, and hyperinflation does not exist in your vocabulary.

When you live in a country where the majority of voters find themselves on the lower levels of Maslow’s scale, then the future of your country is very predictable. The future is only uncertain for those who prefer not to face the facts.

Individuals who are fortunate enough to be able to plan ahead for more than 5 years find themselves at the top of Maslow’s scale. They are living in another country so to speak, on another planet even. The individual who finds himself at the top on Maslow’s scale cannot allow those at the bottom of the scale to determine his future, for that future will represent the circumstances at the bottom of the scale. There is no uncertainty about that.

If we do not want to join the voting majority on their position on Maslow’s scale, we have to isolate ourselves from how they impose their mindset on the legislature. The right to vote is the relentless force that equalises the circumstances in a country with the mindset of the average voter. Determine the mindset of the average voter, and you will see the country’s future.

Yes they need to cut expenditure, therefore salaries and those employed by Government. It’s not going to happen. They will issue more debt, print more money.

The structural reform that investors seek is not the structural reform the “government” has stated it wants to bring about. Just the opposite, actually.

To true. The ANCGovt does not want to implement any structural reforms, let alone the key ones like ‘reduce the public sector wage bill’.

We need urgent structural reforms:

Recovery of stolen money by ANC
Prosecution of all involved in corruption
Complete transparency in procurement in public sector
Governance regulation enhancement
Dramatic drop in wage bill
Energy stabilization
Labour stability
Improvement of regulatory burden
Emigration and Immigration reform (Relaxation of certain visa regulations with a negative influence on tourism and business travelers and a stop to illegal inflow of immigrants)
Renewable energy
Cabinet reshuffle
Partial privatizing of some SOE assets
Education reform
Sunset of BEE as the only way for transformation
Build infrastructure

So 26 years into ANC rule and we’re still at the planning phase for structural reform for the inclusive economy. And we don’t have electricity to grow an economy anyway.

Why is debt crisis and fiscal cliffs even debated? It’s a done deal.

It is not a risk anymore -it is reality.

It has been obvious for years that South Africa is heading for a debt trap. Government will first use prescribed assets and print money like crazy destroying the rand in the process. To try and fund the fast growing state debt cost and bloated public sector wage bill. And of course to loot. Only once this money has been used up will the government be forced to go to the IMF for a bailout. I would expect very violent protests and riots when government implements the forced austerity measures. All public sector workers and pensioners will probably have to take a salary cut, the same thing happened in Greece. The state grant will also be reduced or at least not increased. Right now people should move any discretionary investable funds offshore before exchange controls are tightened to stem future capital flight. South Africa’s future looks very grim. If you are young and skilled emigration may be an option. Those of us that are to old will remain but the life will become a lot more difficult. Unless business and energy friendly policies are implemented very soon we will turn into the next Zimbabwe and Venezuela.

@MarkAndrews. My own thinking is exactly in sync with yours, with respect to SA’s debt.

The ANC will always try the easiest way to access funding first (to cover their expenses/wastage/corrupt,patronage system) and the most difficult last.

So it will be:

1.) Prescribed assets on pension/ret funds (this can take on various forms, even amending Reg 28 would be sufficient, unfortunately). The ret fund industry won’t attach the same strict rules/control such as a global body like the IMF.

Then once the bulk of the country’s retirement fund pot is depleted, which can still take a number of years, even another decade as R6bn is ‘socially applied’ like a tax (manifested through bond defaults in the end), then the next step will follow:

2.) ZAR printing like there is no tomorrow, allowing the ZAR to depreciate like the the Zim$ or Venezualan bolivar.

3.) Once everything is depleted, and little hope left….then you see the typical African country crawling to the IMF for help (…and we’re NO different in our poor African leadership). At this point, no-one would really care, as everything will be lost.

Easy to predict. Study other countries. SA is not uniquely special in any way. We’re just a larger industrial complex that was built up the past 300+ years, hence obviously will take longer to break down. And a comparatively sizable bunch of us ‘racist’ minority holding the country together through taxes collected, and businesses / real entrepreneurship (but dwindling). Along with a few “clever blacks” which Zuma disliked.

SA a mere “last European outpost” at the tip of Africa, which will become exactly like Africa in the next generation: hopeless & forgettable. It has to — the effect of an artificial system of paying AA/BEE candidates more than they’re worth, will see to that. It sucks money out of an efficient economy. It takes a few decades to sink a country like SA & never to rise again. Clever and wealthy blacks knows this, riding the system for what its worth and will hopefully also take their capital offshore & move with their families abroad, for the sake of their kids’ future. But they’ll have to make peace with their new non-African surroundings.

End of comments.





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