A ratings downgrade from Moody’s is very likely in the next month or so, given an average economists’ forecast of a budget deficit of more than 6% of GDP in 2020/2021 and 6% in 2021/2022, according to Reuters.
Meanwhile, with growth forecast below 1% this financial year, and about the same for the year after, the government’s debt to GDP is set to exceed 70%. Already, at just over 60%, SA has one of the highest debt-to-GDP ratios in the emerging-market universe.
SA has the sixth-highest deficit of the major emerging-market countries for which recent data is available. On current trends, it will soon have the fourth-highest burden in this universe.
Moreover, International Monetary Fund (IMF) data shows SA was second only to Brazil among emerging markets in a 2017/2018 comparison of government deficits as a percentage of GDP.
So all eyes are now on SA’s budget deficit, which finance minister Tito Mboweni put at 6.8% this week. This is the size of the hole in the government’s finances.
The make-or-break of SA’s future will be how government sticks to its promises as the large deficit lifts debt levels and burdens.
The budget deficit is not the only worry, of course: a downgrade will make life more difficult, as government will struggle to contain interest expenditure.
Compared with other emerging markets, as recorded by the US Federal Reserve, SA long bonds were 432 points higher than the average in December. I believe this 432 basis point premium shows that a downgrade has already largely been priced in.
Times are different now, too, as the global bond market bubble is still strong (excess money — dollar, euro and yen — created by reserve currency central banks means bond rates are still declining). This makes me believe the SA government bond yield seems to be close to the top.
There is a strong likelihood that SA bond yields may fall after the downgrade, but the relief for government and its interest rate bill might be short-lived.
In the longer term, the mess that is the financial state of government, including the state-owned entities (SOEs), needs urgent attention or further downgrades will be on their way.
Clearly, the market doesn’t trust SA’s ability to turn things around. Clearly that mistrust is already priced in. So a little honesty — or perceived honesty — will go a long way to helping SA long bond yields.
Overwhelmed by interest
Even if Mboweni’s budget was better than expected, we are not out of the woods by any stretch. Budget data shows SA’s interest bill is now forecast to rise to about 5% of GDP in the next few years. This will place interest spending on par with the highly indebted countries that frequently rely on IMF bailouts.
Interest payment remains the fastest-growing expenditure item, robbing SA of its ability to spend money where it needs to, and to provide real tax relief.
If the deficit is not kept in check, then in five years more than 20c for every rand of tax collected will go to pay debt. With debt repayments rising — including SOE-guaranteed debt — interest repayments will head to 6% of GDP. SOE defaults will mean more than 25c of every rand in tax goes to interest repayments.
The interest repayments are both a function of the debt burden and the yield on broader government debt, which reflects the market perception of the risks.
The market has moved decisively against SA’s ability to address the financial and economic situation. But, while headlines scream that the country is in serious trouble, political leaders seem to carry on as before.
The real budget woes are only starting — yet our leaders refuse to listen, or to see the cupboard is bare. They believe that if they say just a few soothing words, or arrest some mayor for corruption, the money will flow again. But most comparison data shows that SA is out of the race to increase living standards, uplift people and reduce poverty. While most of the globe is getting richer and unemployment is declining, relative poverty and unemployment in SA are growing.
The financial market is simply reflecting the human and economic mess SA finds itself in.
All the work of the budget is undone by shouting matches, weak leadership and political parties blowing vuvuzelas while Pretoria burns. The middle class is thumped with higher tax burdens, while the poor get fewer government benefits. Politicians are using the poor man’s name only for their own gain.
• Schussler is the founder of research house Economists.co.za
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