As fears of a sovereign credit rating downgrade resurface, a new report shows the cost of servicing South Africa’s government debt overshot an initial budget by R2.4 billion in 2015/2016.
Downgrade fears have re-emerged after the National Prosecution Authority (NPA) issued a summons for the arrest of finance minister Pravin Gordhan on charges of fraud. Several analysts have long warned that a downgrade could dent investor confidence and lead borrowing and debt-servicing costs.
“The negative impact on investor and business confidence and the sharp fall in the rand mean that the downside risks to SA’s economic performance have risen. If the uncertainty around Minister Gordhan does lead to an investment downgrade, the subsequent rise in borrowing costs for both the public and private sectors will damage both growth and employment prospects,” said Professor Raymond Parsons of the North-West University School of Business and Governance.
The National Treasury’s Debt Management Report for the year to through to March 31 2016, shows government debt service costs amounted to R128.8 billion or 3.2% of GDP.
“This was R2.4 billion higher than initially budgeted, mainly because of rising Treasury bill yields following multiple repo rate hikes by the South African Reserve Bank (Sarb), weakening bond yields and a sharp depreciation of the rand against currencies in which foreign debt is denominated,” Treasury said.
Total government debt 2015/2016
For the period under review, government’s total net loan debt amounted to R1.8 trillion or 44.3% of GDP. As per International Monetary Fund (IMF) recommendations, net loan debt is calculated by subtracting the cash balances on government’s accounts with the Sarb and private sector banks from total domestic and foreign debt.
As at March 31 2016, the national government’s total cash balance was R178 billion, down from R189.7 billion a year earlier. Of the total cash balance, R112 billion was held in rands and R65.7 billion in foreign currencies, which was equivalent to $7.4 billion.
Treasury said government’s foreign currency commitments totalled $1.7 billion, of which $300 million comprised redemptions of foreign loans, with the remainder relating to interest on loans and departmental commitments. It said the commitments were financed by drawing on cash balances and from interest earned.
Around 93% of government’s total foreign debt is denominated in the US dollar and the euro. Treasury said the weaker exchange rate saw foreign debt as a percentage of total government debt increase by 0.64 percentage points to 10.08%. Government has an internal tolerance level of 10% and a limit of 15%.
“In 2016/17, it is anticipated that there will be upside risks to the foreign debt portfolio, as the rand is expected to depreciate further against currencies in which foreign debt is denominated,” it said.
Ratings agencies have warned that rising government and low economic growth could result in a sovereign rating downgrade.
In its latest credit opinion, Moody’s put the ratings of five State-owned entities (SOEs) – Eskom, the Development Bank of Southern Africa (DBSA), the Industrial Development Corporation (IDC), the South African National Roads Agency (Sanral) and the Land Bank – under review. It also warned that mounting debt and continued government guarantees to loss-making SOEs could put the country’s rating at risk.
Government guarantee exposure
Government’s exposure amount, or the amount that SOEs borrow against guarantees, increased to R258 billion during the period, up from almost R226 billion previously. The increase is largely due to increased borrowings by Eskom and South African Airways.
Total actual borrowings by SOEs amounted to R162.4 billion, of which 76% is made up of domestic debt and 24% of foreign borrowings. Treasury expects foreign debt as a percentage of total debt to remain below 30% over the medium term.
“In 2015/16, the cost of funding for SOCs increased due to volatile domestic and international capital markets and in line with increased government funding costs. The credit rating downgrade of some SOCs also contributed to their increased borrowing costs,” it added.
South Africa’s solicited credit ratings at June 30 2016
Ratings agencies, expected to take guidance from National Treasury’s Medium Term Budget Policy Statement later this month, are to announce their decisions on the country’s investment grade status in December.
According to Lesiba Mothata, chief economist at Investment Solutions, the “grandstanding” between the finance minister and NPA is eroding investor confidence.
“It is unfortunate that when South Africa can easily delay a ratings downgrade, it seems poised to deliver its fate to a sub-investment grade decision. Emerging market countries get disproportionally punished for fiscal mismanagement. After many years of prudent fiscal management, it looks like a tipping point has been reached,” he said. He added that no person is above the law and should be tried in court if found wanting.
Capital Economics’ Africa Economist John Ashbourne described the NPA summons and subsequent weakening of the rand as South Africa’s “latest self-inflicted crisis”.
“Today’s events suggest that struggle for power within the ANC may continue to throw up turbulence for South Africa’s already-weak economy,” he said shortly after Tuesday’s NPA announcement.
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