Debt blowout fears — Treasury urged to increase borrowings as last resort

By Ray Mahlaka

1 Oct 2023

The finance department has been backed into a corner by the ANC, raising fears of the state ratcheting up debt.

The National Treasury has few options to stabilise public finances after the ANC shut down most of its proposals aimed at cutting government expenditure and raising revenue.

For the most part, the ANC is against the Treasury increasing taxes (mainly VAT by two percentage points) in February (months before the national election), permanently withdrawing the R350-a-month grant scheme when it ends in March, and cutting the budgets of provinces.

It is also not warming to the Treasury’s proposal to reduce compensation expenses in the state by asking public servants to accept voluntary severance packages and early retirement.

The options the Treasury is considering have been leaked to the media after a meeting between its officials and President Cyril Ramaphosa a few weeks ago to discuss the Medium-Term Budget Policy Statement (MTBPS) due on 1 November, and how to reform strained public finances. Since that meeting and others that have been held subsequently between Finance Minister Enoch Godongwana, trade unions and labour federations, the ANC has seen red.

The head of the party’s economic transformation committee, Mmamoloko Kubayi, said Godongwana and the Treasury acted “illegally” by urging provincial government departments to cut their budgets, especially for crucial service delivery programmes in health, education, and criminal justice.

Kubayi said only Rampahosa had the power to issue such an instruction.

The Treasury has been backed into a corner in its attempts to alleviate the country’s economic position, in which government expenditure has so far exceeded its revenue by nearly R200-billion this year, conjuring fears of the state fast running out of money.

Dire option

Most market watchers have said the Treasury will now be under pressure to borrow more money just to shore up its financial position – a dire option that will bring it closer to a debt blow-out.

Over the past three years, the Treasury has committed to reducing government debt. But it has not been reduced, and is more likely to increase from R4.73-trillion in 2022/23 to R5.84-trillion by 2025/26. Since April, the interest on the debt alone has increased by 19.3% to R98.2-billion, mainly because of raised interest rates, an expense that is high and reduces the state’s ability to spend money on crucial service delivery programmes, economic growth and investment initiatives.

The Treasury has started to increase its borrowings that have a shorter repayment period (about 12 months) in an attempt to compensate for the lower tax revenue collection.

It is finding it difficult to attract lenders that will lend it money with a long-term repayment profile (in some cases 10 or 20 years) because of the noise around the fiscal crisis, which is making South Africa look like it is at increased risk of defaulting on debt repayments.

The Treasury has increased its weekly issuance of treasury bills (debt known as T-Bills) by about R2-billion to more than R14-billion a week from the beginning of August. In other words, the Treasury has invited lenders to buy its debt with a promise of repaying their monies with interest after a short period.

Unlike long-term debt, T-Bills (or short-term debt) are seen to be less costly because they carry less interest than debt that is rolled over a long period.

Lenders are taking up short-term debt and not long-term debt, a sign of their wariness over the fiscal situation ahead of the MTBPS.

Economists estimate the government will have to borrow about R608-billion this year to finance its budget deficit (a larger-than-expected deficit than the 4% of GDP that has been pencilled in by the Treasury) and raise the cash for Eskom’s debt restructuring, as well as to redeem existing debt that matures in the coming year.

International Monetary Fund

Dr Azar Jammine, the director and chief economist at Econometrix, says there is a more dire possibility, in which the government will have to increase its borrowings by approaching the International Monetary Fund (IMF).

“There is a complete fiscal crisis coming. If it is not dealt with adequately, the government will be forced to approach the IMF for money, which will come with more strict conditions.

“In this scenario, then the South African government will be forced by the IMF to reform public finances and implement drastic action instead of doing so voluntarily,” Jammine told Daily Maverick.

In 2020, South Africa borrowed R70-billion from the IMF to fund its Covid response, a loan payable over five years. This money did not come with many conditions such as the IMF imposing drastic measures for the government to reform and restructure its public finances.

Sanisha Packirisamy, an economist at Momentum Investments, sees more room for the Treasury to borrow money, but said this should be the absolute last resort after considering expenditure cuts such as nonessential expenditure (including travel, accommodation, catering and workshops for state officials).

“With the government’s share of foreign-denominated debt at just above 11% of the total, there is potentially space to increase this marginally, given the risk threshold of 15%,” she said.

But investors and lenders, especially foreigners, are wary of South Africa’s fiscal situation. Investec chief economist Annabel Bishop said foreign investors were currently small net purchasers of government bonds (or debt) in the year to date.

But in January and July, these investors showed increased interest in government bonds, buying such instruments worth R4.1-billion. Since then, their purchases have been down. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.

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Dire option

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