Share

Bailouts carry major risk for debt to GDP ratio, warns Kganyago

Bailouts for state-owned companies risk pushing the country’s debt-to-GDP ratio to among the highest in emerging markets, South African Reserve Bank Governor Lesetja Kganyago warned on Wednesday.

He delivered a public lecture at the University of South Africa (Unisa) in Pretoria on the mandate of the central bank, amidst divisions within the ANC over its mandate and shareholding.

"Because we have borrowed so much from abroad, we pay a rapidly rising amount of interest to non-SA creditors, and this is contributing to a large current account deficit – again, one of the biggest in our peer group," Kganyago warned.

Kganyago speech comes a day after Finance Minister Tito Mboweni announced a R59bn bailout to Eskom over the next two years, using a special appropriations bill. This comes over and above the R23bn a year for the next three years earmarked for the power utility in February.

Mboweni also indicated that other cash strapped state entities such as Denel, South African Airways and the SA Broadcasting Corporation (SABC) will also receive government support.

The International Institute of Finance (IIF) said earlier in July that the country’s debt-to-GDP ratio reached 59.3% in the first quarter of the year. Many economists have warned that going above a 60% debt-to-GDP ratio could have worrying consequences for SAs credit rating.

Barely any growth

Kganyago, who was re-appointed by President Cyril Ramaphosa earlier in July for a second five-year term, emphasised that monetary policy or the lowering of interest rates would not improve economic growth levels.

"We don’t have balanced and sustainable growth in South Africa. With annual GDP growth rates under 1%, we barely have any growth," he said.

"And as our economic circumstances get more difficult, I worry that more people will choose to avoid making hard choices and pretend they do not need to be made, as if the SARB could just cut rates enough and all will be well," Kganyago said.

Another flashpoint around the Reserve Bank has been the ANC’s December 2017 resolution to buy out the central bank’s private shareholders.

Kganyago, who has been vocal on this issue, says it was a R200 000 debate, as this is the dividend they are paid, and he questioned why the state would pay money to buy the shares, instead of fixing a hospital or school.

"There is no private ownership of the Reserve Bank. There are private shareholders, but they don’t own the bank," Kganyago commented.

He compared the issue of private shareholders to a Trojan horse, which was used as a ploy by the ancient Greeks to enter the fortified city of Troy. Kganyago said private shareholders are being used as a "distraction" away from difficult conversations that are needed for economic growth.

Part of an orchestra

As was widely expected, the SARB cut interest rates by 0.25% points earlier in July, bringing the repo rate to 6.5% and the prime lending rate to 10%. The consumer price index (CPI) for June remained unchanged on Wednesday at 4.5% ,which is the midpoint of the central bank’s target range of 3-6%.

Kganyago said that by anchoring inflation expectations at lower levels, there are lower long-term interest rates which support investment and helps government to finance the growing debt burden.

"By maintaining a credible monetary policy and a short-term interest rate that compensates investors for risk, we help to maintain capital flows into South Africa," Kganyago added.

He compared the central bank to part of an orchestra, not the soloists, in achieving economic growth.

"Balanced and sustainable growth also requires contributions from many other parts of government and society," Kganyago said.

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.89
+0.2%
Rand - Pound
23.87
+0.1%
Rand - Euro
20.39
+0.2%
Rand - Aus dollar
12.32
+0.1%
Rand - Yen
0.12
+0.1%
Platinum
908.05
0.0%
Palladium
1,014.94
0.0%
Gold
2,232.75
-0.0%
Silver
24.95
-0.1%
Brent Crude
87.00
+1.8%
Top 40
68,346
0.0%
All Share
74,536
0.0%
Resource 10
57,251
0.0%
Industrial 25
103,936
0.0%
Financial 15
16,502
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders