By Kopano Gumbi, CNBC Africa markets reporter
The national treasury has acknowledged that the risk to South Africa remaining investment grade has become more pronounced. A sharp increase in borrowing requirements, unstable electricity supply and reduced tax revenue collections have put strain on the nation’s fiscal position.
In the last year alone, the government’s gross borrowing requirements increased by 21.4 percent to R407 billion. The government’s debt requirements over the next two years will reach nearly R500 billion. The debt to GDP ratio continues to rise, it is expected to be 65.6 percent of GDP by the end of 2020/21.
“Although our budget deficit rises to 6.8 percent, we are nevertheless determined to bring it back,” asserts Mboweni.
The majority of South Africa’s debt is through domestic loans but as the national treasury has stated, debt is not expected to stabilise over the medium term. A change in the country’s sovereign rating to sub-investment grade would lead to short-term volatility in the financial markets, including an increase in borrowing costs and exchange rate depreciation. The government is of the view that this would unlikely affect its ability to finance its medium-term borrowing requirements.
In trying to exercise more financial prudence, the government would need to demonstrate that it has a handle on its state-owned entities. According to government, it has allocated R162 billion to aid financially stressed companies over the last 12 years. SAA, SA Express, SABC, Denel and Eskom have been the biggest drain on the state’s resources. Eskom, the embattled power utility, has received the lion’s share of this assistance. The total debt of these entities amounts to R760 billion, with 62 percent guaranteed by government.
“Over the next three years, debt repayments total R178.1 billion, of which R103.5 billion is held by Eskom,” estimates government.
In the coming financial year, government has committed to provide SAA with an additional R16 billion bailout over the medium term, even though the company is in voluntary business rescue.
Eskom, which has debt of R450 billion, has received hundreds of billions from the government and many proposals have been put forward to assist the ailing power utility. Including, most recently, a proposal to use the Public Investment Corporation as an investment vehicle.
Minister Mboweni didn’t scoff at the idea of using public funds to pay off a large portion of Eskom’s debt, saying that it was not a bad idea.
“We must be clear that it’s not only public-sector pensions that will be used,” Mboweni said in an address ahead of the budget speech. “If we are going to use pensions, it must be all of our pensions.” This would include private pension funds. The minister outlined that discussions around this are developing and that role-players, in government and in the unions, are coming around to the idea. Mboweni said that this would now introduce the idea that public sector investment could start to happen in Eskom, a point that has been highly contested.