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SA’s debt surge must stop – Moody’s

Government debt, including guarantees to Eskom, expected to reach over 70% by 2023.

Fresh on the heels of the South African elections, rating agency Moody’s says the country’s long-term growth outlook is weak and one of the main challenges of the new government will be to stop and reverse the country’s rising debt.

In its latest research report, the rating agency said the government needs to urgently put in place effective policy changes in order to tackle the country’s low-growth challenges, rising debt and weak state enterprises and institutions.

“While South Africa has strengths, including a favourable government debt structure and a large pool of domestic investors, in the absence of effective policy change, the sovereign’s credit profile will most likely continue to erode, with fiscal strength weakening and growth remaining low,” said Lucie Villa, a Moody’s analyst and the report’s co-author.

South Africa’s foreign debt is rated Baa3 by Moody’s, which is just shy of junk status with a stable outlook. Moody’s is the only major rating agency that has not downgraded SA’s foreign debt to junk.

“Fading prospects of policies that will sustain fiscal and economic strength, alongside any signs of diminishing resilience to shocks, would put downward pressure on the country’s rating,” Villa added.

But even with the momentum from policy reforms, Moody’s expects South Africa’s gross domestic product (GDP) growth to remain one of the lowest amongst the Baa3 countries rated the agency.

 

Outlook

The state’s debt burden is expected to rise by 65% of GDP by 2023; this could be pushed over 70% when you include guarantees to embattled power producer Eskom.  

Moody’s notes that this is a trend that contrasts with South Africa’s Baa3 peers. “Highly leveraged state-owned enterprises, including Eskom, remain a source of risk for South Africa’s fiscal strength.”

“In seeking to arrest the rise in indebtedness, the government will need to overcome spending pressures relating to interest and wages, together with obstacles to raising further revenues including from the diminishment of Sars’ capacity under the Zuma administration,” said Villa.

No immediate fixes

While it’s expected that President Cyril Ramaphosa – the bearer of a ‘new dawn’ – and the government will now aggressively pursue the cleanup campaign against corruption and state capture, as well as implement policy reforms Moody’s said the socio-economic environment will delay and constrain the impact of wider structural reforms.

“A polarised society with inequalities along income, professional categories, races, rural/urban population, makes deep reforms difficult. A reform will often be perceived as greatly favouring one category to the detriment of another,” said Villa.

Reforms to South Africa’s labour markets will face opposition from the country’s unions and other interested groups.

Even in the event of such reforms, the results will not happen overnight, with Moody’s stating that it does not expect a “significant acceleration in employment in the foreseeable future”. This week, Statistics SA announced that the country’s unemployment rate increased to 27,6% in the first quarter of 2019. In 2018, Moody’s says only 29% of the population of South Africa was employed, “the lowest level among Baa2-Ba rated [emerging markets].”

However, despite a weak long-term outlook and eroding fiscal profile, Villa said the country’s debt composition and economy provided “credit strengths that bolster the sovereign’s resilience to shocks and support the sovereign’s Baa3 rating.”

“South Africa’s large pool of domestic investors and the maturity and currency structure of its debt, mitigate government liquidity risks,” said Villa.

She added that among the country’s strengths is a diversified economy with sound policies. In addition, South Africa’s floating exchange rate and debt, which is primarily in rands, will be able to insulate it from shocks.

“Signs that this resilience has diminished – making the sovereign more vulnerable to a sudden shift in financing conditions, for instance – would weaken the credit profile,” said Villa.

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In light of the runaway debt levels, Moody’s makes the following remark, “SA has a favourable government debt structure and a large pool of domestic investors”.

We should read between the lines. What does this mean? Well, it means that the government owes most of its debt to local lenders and that there are a lot of pension savings around. The government is able to repay its debt in terms of Rand, plus there is a large pool of pension savings, also denominated in Rand.

What is the well-disguised warning here? There is nothing positive in this statement for locals, on the contrary, it is downright scary. It means that the government can easily print the money to repay the debt. It also means that the government has room to implement currency devaluation as a strategy to transfer the pension savings of citizens to repay the government debt.

This is our saving grace, according to Moody’s. What they are basically saying is that South Africans will only be stealing from themselves. On the basis of this observation, they give us an investment rating. We have got an investment rating from Moody’s because our government is able to steal from local savers.

Saying it like it is, as always, Sensei. Super scary stuff.

Thank you, Griet. I appreciate your comment. We are scanning the news for signs that circumstances are improving. We are looking for positive information to confirm that we may avert a credit crisis, debt downgrade, currency crisis and such nasty stuff. The positive signals will come in the shape of the privatisation of energy generation, action against the stranglehold of labour unions, the incarceration of the entire Zuma-faction, the privatization of SOEs and the acceptance of an aid package from the IMF.

We have heard a lot of talks, but we have not seen any of these positive steps yet. Therefore, we are clearly still heading for a financial catastrophe. How much time does our president actually need? Christine Lagarde is waiting for his call! Even a Whatsapp will do the trick. This is the wrong time to play hard-to-get…..

No, not South Africans stealing from themselves. Government will be appropriating from the have’s to give to the have-nots, minus commission. By stealth, and with Moody’s blessing. Because they know there is money for them to get paid. Sadly a savers/taxpayers revolt only accelerates the printing presses.

@Sensei: Appears the object is to focus on reduction of the number of “haves” and bring them closer to the level of “have nots” in the population. Then everyone will be able wallow happily in the same misery and the magic Gini Index will look so much better and ensure the country is free from IMF dependence. We will withdraw from BRICS and join the newly formed ZVS. We can look forward to the new dawn with anticipation. As in the time warp.

@Paining, you are right, but I believe we are giving the ANC leadership way too much credit. It is becoming increasingly clear that there is no leadership in the ANC. There is no coherent strategy either. The sooner we all realize that the ANC leadership is a loose affiliation of looters and that each individual has only his own personal narrow self-interest at heart, the better. They are not even really trying to better the lives of the poor or to engineer equality. That is only the well-communicated smokescreen to impress the ignorant and naive lefties and throw some uninformed journalists off the track. I believe that the current president does not fall into this category, but the rest of them certainly do.

The ANC leadership, all ANC cadres, every ANC ward councillor and every ANC member do not care about the nation, the poor or any of those “moral” issues. No, people who care about moral and ethical issues fall in the highest category of Maslow’s hierarchy of needs. The ANC leadership are from the lowest category of Maslow’s hierarchy. They are only interested in self-preservation and maximal exploitation of whatever is available to them.

Don’t get me wrong. This is not a race issue. This is a socio-economic issue. Therefore, it is close to impossible to solve.

Sensei, what is your advice for beginner investors like me, how and where should i invest my money, considering the direction our country is going.

As the chief of money 🙂 , my advice would be to open a TFSA account at EasyEquities or ABSA stockbrokers, then invest in one of the cheap world equity tracker ETFs such as Sygnia Itrix MSCI World Index ETF or Satrix MSCI World Equity Feeder ETF.

The benefits of doing this are massive diversification both in sectors, countries, political and currency as well as the benefit of it being very low cost and easy to do.

Thank you for asking this very important question. I will try to be as candid as I can be. Firstly, keep perspective. Manage your thought-processes to stay positive, objective and in a mentally healthy state. We live in a lovely country, with a wonderful climate, where the majority of people are respectful, friendly and kind. Life is relatively affordable and we have a wonderful constitution and our judiciary and Reserve Bank are proudly independent. Our financial system is the envy of the world. We have got relatively strong faith communities and strong civil society and a free press. We are blessed with brave and highly intelligent investigative journalists. This is without a doubt a good country to live in.

We also happen to live in a time of financial crisis. The duration and severity of this crisis depend entirely on the decisions of the citizens. The solutions are at hand, but the elected politicians find it politically impossible to implement because they are of weak moral and ethical fibre.

That brings me to the point. We can choose to live here, but we should protect our capital until we see signs of a positive turnaround. Now I can only tell you what my opinion is. I do not know your circumstances so it will be irresponsible of me to give personal advice. A high and redistributive tax regime acts against the profitability of real estate. I prefer listed investments. Your pension plan or unit trusts are managed by highly competent people and the industry is well-regulated. Your funds that are managed by the local Financial Industry are relatively safe. It is not the Financial Industry we are worried about, we are worried about the mistakes and actions of the government. The end of this road is hyperinflation of the currency and this is what we need to protect ourselves against. Any asset that rises with inflation will be an effective hedge against inflation. Tampons were one of the best “investments” during the hyperinflation in ZIM and antibiotic medication is one of the best investments in Venezuela at the moment.

The Zimbabwean stock exchange was the best-performing exchange in terms of the Zim-Dollar during hyperinflation. We should not invest in, or save in interest-bearing instruments like government bonds or longer-term deposits. These instruments are short-term cash-flow solutions and not intended to hedge against inflation. The first prize is money offshore in an investment account. There are many local managers who offer these options. The second prize is offshore instruments that are listed on the JSE. The S$P 500 and the Nasdaq 100 among others are international indexes that are listed on the JSE and offers convenient and effective inflation and Rand hedges.

The easiest and most efficient way to protect your capital is to get the right people in government. If you believe that won’t happen, then the next step is to protect your capital against this government. The problem arises when the government prescribes that you should invest in government bonds. This implies that the government will force you to lend your money to them. You will then be funding their political mistakes. This is the situation you want to avoid. Now you can have this discussion with your financial advisor. Ask him how he plans to protect your assets against “prescribed assets”. If he looks at you with a blank face, find another advisor.

You get excellent advice below but I also advise that you invest in yourself. Set yourself up with qualifications, contacts and the paperwork to be a global citizen, able to travel and work, as well as invest directly, in more than one country. You never know when portability could be useful; ask any Zimbo.

Well spotted Sensei; on the button. Based on the debt : GDP scooting to around 90% when SOE debt is added, and the stagnant growth but expanding unemployment and population, the Moody’s view seems lax. Some commentators seem to think 60% for a 3rd world or emerging market is enough to give the IMF a begging call. Then add that much of the debt goes to fund unreformed crooked organisations like Eskom, SAA and Transnet plus bloated government salaries. Nothing (well, less than nothing – money is wasted on vanity projects like Coega and the Wild Coast Toll Road) on infrastructure that would improve growth.

So are they being generous with the social engineering, swallowed Rama soft’s lies, idle as they were in 2007 or just don’t care; if SA lenders want to swallow government debt, why should Moodys care?

Trevor Manual has a lot of experience in slashing state expenditure. After 1994 it was easy because the affected people were not ANC supporters.

If the EFF was in power they could replace 75% and put their people into less than 50% of these positions. Just a thought??

Think you’d be a fool to bet on the government pulling any of this off.

And to top it we are throwing an inaugural party that they say will cost R140 bar. The way these guys spend money it will be a lot north of that.

The man is the president now, why not just show a little financial discipline, send in MM and he can do the oath thing in his office and we all get down to work.

The residents of Alex and other shanty towns will love it.

As someone noted; if the prez was paying with his own money, guests would be lucky to get 2 pieces of KFC. So much for wealth redistribution; it is the ANC “leadership” pockets and stomachs front and centre of the line. Hypocrites to the last.

Hereshoping
I live in a small town in KZN. The municipality charges 6-8000-00 rand to put in a prepaid electricity meter. I contacted an electrical company in Johannesburg owned by an African gentleman. He quoted me 600.1000 rand to do the same job as long as I got a few extra people on board. I have managed to get 100 people in my complex so far so I phoned him. He phoned back to say there is nothing he can do as all the work is carried on by our municipal guy and one electrical company only. How are we meant to grow the economy when this sort of nonsence carries on.

It took Eskom 15 months to install my pre paid meter, but I got it for nothing lucky hey??
Now I cannot get anyone at Eskom to register it so am running on a generator twice a day. Not so lucky now……

I think they have SA in the wrong spot. We have NO GROWTH – zero.

So I bet if asked the unions to run this country they would say “hell, no thank you – we’d be mad to even contemplate it”. So the logical way forward is to place moratoriums on all minister salaries for at least 5 years. Preferably 10 years. And after that period, annual salary increases of no more than 5%. The above principle must be in place for all government ministries and boards wherever they are. Also retrench to at least pre zuma era. In all departments. Privatise where possible and the seemingly impossible – get our money lost to corruption back. No other way to avoid a fiscal cliff and ratings downgrade. The current state of affairs you’d have to go short on the rand unfortunately. It’s for government to face the inconvenient truth. It’s going to be a bumpy road and we haven’t reached turning point yet.

I hope I’m wrong but the debt spiral is just starting and this means very, very, very hard times are on their way. The social unrest will be extreme.

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