The Medium-Term Budget Policy Statement (MTBPS) shows that National Treasury is doing its best to hold the line against rising political pressure to increase spending. Although spending excluding interest on debt has increased this year by R30 billion, of this R27 billion is financed by re-prioritising existing spending. While this may not be possible, it is important that Treasury is signaling to investors its intent to respond to political pressure in the most prudent way possible.
The outcome of the debt profile in the MTBPS was largely expected and in line with our in-house expectation that issuance of South African local currency bonds would not be increased, despite the rather terrifying redemption profile that SA faces over the next ten years. South Africa’s rand denominated redemptions have averaged R33 billion per annum over the past five years; however, over the next five years it will average R130 billion per annum.
And, five years after that, out to 2031, the amount of local currency debt maturing will rise to R250 billion per annum. This is cause for concern, considering SA runs a budget deficit of between R300 billion and R400 billion, which means not only do we need to raise debt to pay down maturing debt, but SA also needs to raise debt to pay its annual bills.
In addition, because the country’s credit worthiness has deteriorated in the eyes of investors, debt that was issued in the past at par i.e., for every R1 of debt the fiscus incurred, it received R1 in cash, SA now issues at a discount of around 83 cents i.e., for every R1 of debt incurred Treasury only gets 83 cents. This runaway train is accelerating exponentially and unfortunately our National Treasury has less and less control over the budget.
In order to reduce the cost of debt, the MTBPS shows that, where possible, Treasury is shifting its debt profile away from instruments with long-dated maturities towards those with shorter-dated maturities that are cheaper, such as Treasury-bills, Floating Rate Notes with three- and five-year maturities, and a newly announced local currency Sukuk (Islamic Bonds).
Finance Minister Enoch Godongwana was decidedly candid in his speech, stating that SA’s fiscal situation is unsustainable. He also explained that government spending is unproductive, citing that while spending by government has been increasing, GDP per capita has been falling, questioning the theory that reducing government spending will have a negative effect on growth.
Markets responds positively
Markets saw a relief rally on the absence of any negative surprises in the budget. The rand, which had already firmed ahead of the speech, greeted the news with a further 1% gain to dip below the R18.60/$ mark, bringing total gains since last Friday to 3.3%.
The 10-year RSA bond dipped 20 basis points on the news while the 5-year bond saw a similar uptick, reflecting the confidence being placed in this medium-term framework.
We expect that by 2025/26 a decision will have to be made with respect to restructuring and rationalising government’s spending on the SRD grant, job programs, social grants and free basic service provisions. Without this, South Africa will have to adopt increasingly unorthodox and interventionist public finance policy measures, in order to keep issuing debt at yields which are in line with our current BB rating.