Budget 2014: Debt

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At a time when rating agencies are closely monitoring emerging markets, government debt figures released yesterday in the Budget Review provided a mixed picture.

In line with a lower-than-expected budget deficit, the borrowing requirement in the 2013/14 fiscal year was lower than forecast. At R162.9 billion, it is R5.6bn below the October estimate and R15.1bn below the 2013 Budget estimate.

However, debt service costs are set to be R1.5bn higher than the October estimate, mainly due to the weakening rand and higher interest rates on short-term loans.

Moreover, the borrowing requirement, in combination with inflation and rand depreciation, will boost net government loan debt from R1.4 trillion in 2013/14 to R2 trillion by 2016/17. As a ratio of gross domestic product (GDP) it will increase from 39.7 percent to 44.3 percent.

This is not alarming – many countries have higher levels. But the ratio has risen sharply from 29.8 percent in 2010/11 and rating agencies would like to see stabilisation.

The review says debt service costs “will remain manageable, stabilising at 3.1 percent of GDP in 2015/16”.

In September, the government raised R19.6bn in global markets with a $2bn issue that was nearly four times oversubscribed. While the Treasury plans to raise about $1.5bn a year in global markets over the medium term, it minimises its foreign borrowing to protect against rand weakness. Foreign currency debt is about 10 percent of all debt, the review says.

To diversify funding, the government will enter the sukuk market this year. And it will consider borrowing from export credit agencies to finance projects with large foreign exchange commitments.

Last year, despite negative sentiment about emerging markets, foreign ownership of domestic government bonds rose to 36.4 percent of the total, from 35.9 percent in 2012 and 13.8 percent in 2009.

The review noted that last month, non-residents were net sellers of R22.4bn government bonds, reducing their overall holdings to 35.7 percent.

The selling could continue as the US phases out quantitative easing, making emerging market investments less attractive. – Ethel Hazelhurst

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