Rapid rise in debt costs crowds out state spend on social issues

2016-10-27 15:02 - Carin Smith
Sanisha Packirisamy of MMI Investments (Supplied) ~ Supplied

Cape Town - Nearly 12 cents in every rand of state revenue goes towards debt-servicing costs, Sanisha Packirisamy, economist at MMI Investments and Savings, said on Thursday in reaction to the mini budget delivered by Finance Minister Pravin Gordhan.

"Due to the increase in government borrowing, debt-servicing costs are expected to remain the fastest-growing expenditure item between the financial year 2016/17 and the financial year 2019/20, increasing at an average rate of 11.0% year-on-year per annum.

"The rapid rise in debt-servicing costs is crowding out other (social and growth-enhancing) spending priorities and has been raised as a key concern by the rating agencies in the past," she pointed out.

At the same time, the borrowing requirement has increased by R8.6bn in the financial year 2016/17. Government expects to increase net issuance of short-term loans from R25bn to R40bn to finance the higher budget deficit in the current fiscal year.

"The increase takes short-term debt as a share of total domestic debt to 11.2%, relative to a strategic benchmark of 15%, implying that short-term refinancing risk remains reasonably low. Although the share of long-term debt as percentage of fixed-rate and inflation-linked bonds (at 14.9%) remains low relative to a 25% benchmark, government remains committed to their bond-switch programme that aims to exchange short-term for longer-term debt," said Packirisamy.

Government raised an additional $2.3bn in new foreign loans in September, which takes the foreign debt share of total government debt to 9.3% - well short of the 15% benchmark.

READ: How analysts view Gordhan's mini budget address

In looking more closely at the mini budget, Packirisamy said that although Treasury acknowledged the importance of improving the policy environment - particularly in the fields of mining, immigration and communications - unfortunately no new details around labour reform or the mineral and petroleum resources development amendment bill were disclosed.

In her view, there was also little new information provided about longer-term projects, including the National Health Insurance (NHI) plan and nuclear energy. An additional R9m will be allocated to the NHI grant and Gordhan said that while the nuclear power initiative will be led by Eskom, every effort would be made to ensure that procurement arrangements are transparent.

"Although Eskom’s revised projections show that cash reserves are likely to exceed R150bn in ten years’ time, there is still a significant risk, in our view, that the need for government support may increase, raising fiscal risks in the long term," cautioned Packirisamy.

READ: BUDGET AS IT HAPPENED: Our long walk is not yet over, says Pravin Gordhan

"Even though the medium-term budget showed a commitment to fiscal austerity, lukewarm economic growth prospects (in the absence of structural reform or another commodity price boom) over the medium to longer term will likely struggle to keep up with population growth, leading to a minimal recovery in overall living standards and social inequality."

As such, Packirisamy still sees a reasonably high likelihood of SA being downgraded to sub-investment grade by rating agency Standard and Poor's over the next nine months. This is as sluggish gross domestic product growth poses a risk to fiscal consolidation and debt stabilisation in the medium term.

"It is unlikely that markets are pricing in much more than a one-notch downgrade at this stage, although we assume a downgrade to sub-investment grade to trigger a strong response from government to prevent a negative debt and credit ratings spiral," she concluded.

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