Robert Brand and Mike Cohen
South Africa’s debt servicing costs, the fastest-growing government expenditure as bond maturities are lengthened, threaten to overtake health-care spending, putting pressure on hiring workers such as nurses and teachers.
Finance Minister Pravin Gordhan is selling more long-term debt to refinance short-dated securities as R119 billion of repayments loom over the next three fiscal years, according to the National Treasury. While the strategy is reducing near-term funding risks, it is driving up interest costs. A limit on the number of civil servant positions will trim salary costs, budget documents show.
“At what point does the fact that you are paying higher interest overshadow the benefits from lower financing risk?” said Jonathan Myerson at Cadiz Asset Management. “I’m not convinced. We’ve overdone it.”
The average maturity of South African debt in Citigroup’s World Government Bond Index is 12.9 years, the longest after the UK among 23 sovereign markets tracked, according to Adriaan du Toit at Citigroup. Poland’s is 4.5 years and Mexico’s 8.25 years.
Interest payments on government debt will be R100.5bn in the fiscal year through March 2014, according to the Treasury. Costs will climb an average of 10.4 percent annually over the next three years, compared with 8 percent in total spending. Debt costs will reach R135.4bn in fiscal 2017, compared with current spending on health of R126bn, according to its data.
Gordhan is being squeezed by waning tax collections as government forecasts show economic growth slumping to 2.1 percent this year, the slowest since the 2009 recession. That is forcing him to pile on debt even after Moody’s Investors Service said failure to curb borrowing would threaten the nation’s credit rating.
In the medium-term budget, the Treasury said it would maintain the number of state workers, including nurses and teachers, at 1.25 million for the next three years to rein in its salary bill. Wages for national and provincial government employees will cost the state an estimated R365bn this year, or 35 percent of total spending.
“The hands of the Treasury were tied given recent scrutiny on public finances,” Mohammed Kazmi, an emerging markets strategist at Royal Bank of Scotland, wrote in a note. The rating companies would probably “focus on the rising debt levels and debt service costs”, he said. “These worries are reasons we think the South African sovereign will likely be downgraded.”
Moody’s ranks South African debt at Baa1, the third-lowest investment grade, on par with Thailand and Russia. Standard & Poor’s downgraded the nation a year ago to BBB, its second-lowest grade, and Fitch Ratings followed with a similar cut in January. Moody’s and S&P have a negative outlook on the rating, indicating they may lower it further.
The rand gained 0.2 percent to 9.8127 per dollar as of 9.54am in Johannesburg, paring its fall this year to 14 percent, the worst among 16 major currencies monitored by Bloomberg. Yields on benchmark bonds due in December 2026 rose 3 basis points to 7.87 percent.
While the International Monetary Fund advised targeting a ratio of 40 percent, gross government debt will climb to 44.8 percent of economic output this fiscal year and increase to 47.7 percent of gross domestic product in 2017 before stabilising, according to Treasury forecasts. Bond sales to finance the budget shortfall this fiscal year are set to rise to R170.7bn, from R161.6bn the year before.
Investor perceptions are deteriorating. The cost of insuring the nation’s dollar debt against default for five years has increased 34 basis points this year. The extra yield investors demand to hold South Africa’s dollar bonds rather than US treasuries has climbed 99 basis points to 2.62 percentage points in the period.
The yield difference between 10-year bonds and securities due in February 2048 has climbed 37 basis points since reaching a 12-month low in June. South Africa’s 30-year yields are the highest out of 17 nations tracked by Bloomberg.
“South Africa’s yield curve is probably one of the steepest in the world,” Myerson said.
By focusing issuance at the long end “we lose out on the benefit of borrowing at lower yields where they could be available”. – Bloomberg