Q&A: SA's growing debt, and govt's options

2019-02-09 13:21 - Lameez Omarjee
White paper boat is sinking in the sea water. The
White paper boat is sinking in the sea water. The blue sky background ~ iStock

Treasury projects SA's debt-to-GDP ratio to climb to 60% by 2021/22 - and last year Finance Minister Tito Mboweni warned that when this happens, the country may have to consider approaching the International Monetary Fund (IMF) for a loan.

At the time, he and other Treasury officials were briefing Parliament's standing committees on finance and appropriations on the medium-term budget policy statement.

Treasury-Director General Dondo Mogajane added that resorting to an IMF bailout was something the country should avoid at all costs, Fin24 reported previously.

According to the 2018 mini budget, government's total gross loan debt stood at 52.7% and Treasury projected it would jump to 55.8% for the 2018/19 fiscal year.

With the national budget scheduled to take place on February 2018, Treasury is expected to provide an update on debt-to-GDP ratios.

Economists shared their views with Fin24 on the country's debt status and what options government has to service growing debt.

Fin24: Do your projections for the debt-to-GDP ratios differ to those of Treasury?

Annabel Bishop, Investec Chief Economist: Not essentially. The projections are high already, and appropriate in a weak growth environment, where growth may disappoint even further. That is, it has become a trend for economic growth forecasts made at the start of the year to be revised down throughout the year.

Sanisha Packirisamy, Momentum Investments Economist: Momentum Investments’ expectation is for the 2019 fiscal and debt trajectory to broadly reflect the projections Treasury outlined at the October 2018 mini budget.

Fin24: How can we service debt?

Bishop: Substantially faster economic growth would assist in raising revenues, while cutting current expenditure would free us revenue to service debt.

Cut expenditure in order to borrow less, which will reduce debt levels and so not crowd out private sector investment as much, and stimulate economic growth.

Packirisamy:  Cutting the excess out of government’s growing wage bill would provide a sustainable downward revision to expenditure, which would aid the country’s debt profile (and its associated interest bill) in the medium to longer run.

Fin24: Is a fiscal cliff looming?

Bishop: It is potentially for Eskom, with rescue likely needed, [and] potentially for the Public Investment Corporation.

Packirisamy: Concerns over fiscal sustainability are likely to re-emerge in 2019. A lower nominal GDP growth environment could put additional pressure on revenue collection.

While Momentum Investments anticipates the expenditure ceiling to remain intact and Treasury’s promise of deficit-neutral support to state-owned enterprises (SOEs) to prevail, SOE funding requirements remain a further risk to SA’s overall debt trajectory in the medium term.

Fin24: Treasury has warned against us having to head to the IMF – are we safe or is that potentially where we are heading?

Bishop: The extreme down case is one where SA is at risk of defaulting, or actually defaults on its debt and has a 10% weighting in our scenario.

Packirisamy: At this stage, Momentum Investments believes SA can avoid having to head to the IMF, given the political will to turn the SA ship around. Other factors include the expected fiscal and debt trajectory, which is expected to stabilise within the medium term. There is also Treasury’s commitment to the expenditure ceiling to preserve the country’s long-term fiscal sustainability.

*Answers have been edited for brevity and clarity.