Filomena Scalise

Careful financial management could save South Africa nearly R80 billion in debt over the next three years, Econometrix chief economist Azar Jammine said at a post-Budget presentation on Friday. Last week’s Budget showed a cumulative general government borrowing requirement of R578.4bn by 2014/15, down from the R658.4bn projected in October.

If the government has to borrow less than was previously thought, either taxpayers will have to fork out less to cover the interest bill or the government will have more to spend on capital projects to grow the real economy and on social services.

The better estimate is due to lower deficit projections over the next three years. The deficit is the shortfall between revenue and spending – which has to be raised in capital markets.

Jammine said South Africa’s debt level was comparatively low at 40 percent of gross domestic product (GDP) in the current fiscal year and was set to rise to 42.4 percent by 2014/15. This compares with a ratio of close to 250 percent of GDP in Japan, over the next three years, about 180 percent in Greece and more than 100 percent in Ireland, Italy, the US and Portugal.

However rating agencies Moody’s Investors Service and Fitch had highlighted South Africa’s sovereign debt as “a potential weakness because of the trajectory of debt in recent years”, Jammine said. He noted that the ratio of debt to GDP had increased a lot faster than most other emerging markets, climbing from 27.2 percent in 2008/09.

For this reason, the two agencies have changed the outlook on the country’s rating from stable to negative.

“That’s not a disaster in itself,” Jammine said. “South Africa’s credit rating in itself is actually reasonably good.”

After downgrades of the ratings of Spain and Italy, South Africa was very much on a par with those countries “in terms of image and incentive for foreign investors to buy our debt”.

South Africa has a BBB+ from Fitch and an A3 from Moody’s. Spain has an AA- from Fitch and an A3 from Moody’s and Italy has an A+ from Fitch and an A3 from Moody’s. All the outlooks are negative.

“But the danger is that if government were to allow its debt to rise any further, the way Moody’s and Fitch feared, because of populist pressures to spend more, we may well see that debt level escalating, and our credit rating downgraded.”

That would make it harder and costlier for the government to raise funds in the future.

Jammine explained the importance of a credit rating. “A lot of pension funds buy government bonds based on their credit rating, so the higher the rating the more likely you are to attract investment.”

While the latest Budget figures are encouraging, Jammine highlighted the risk of lower growth.

ETM Analytics managing director George Glynos is sceptical about the GDP growth projections. While Gordhan revised this year’s growth estimate down to 2.7 percent from the 3.4 percent forecast in October, he foresees growth rising in the years ahead to 3 percent, 3.8 percent and 4.3 percent. Glynos said this was “way too generous on the upside”.

If growth comes in lower than expected, future revenue will also disappoint and the budget deficits will be higher. - Ethel Hazelhurst

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