With talk of a downgrade in the government’s credit rating hot on the tongues of all economic enthusiasts, it is valuable to have a look at what the government’s position is when it comes to external debt.
External debt is the amount owed by the South African government to foreign lenders. It is an important statistic because external debt and its interest payments have to be paid in foreign currency – usually US dollars.
If South Africa does not have foreign currency then it will have to purchase it, making its debt repayments sensitive to fluctuations in the exchange rate.
The good news, however, is that this very rarely happens. Foreign debt is paid for with foreign exchange reserves, which come into the country every time somebody exports a good or service or when a foreign investor brings direct or portfolio investment into South Africa.
Attracting foreign investors, therefore, is not only important in terms of growth, but also to ensure that our foreign reserves remain at a level with which we can comfortably repay our external debt.
External debt is broken into public debt, money owed directly by the government and its agencies, and publicly guaranteed debt, money owed by private organisations that is guaranteed by government.
In both cases the risk to the lender lies in the government’s ability to repay the debt. Governments are downgraded when their ability to pay their debt is perceived to be declining. According to a global study compiled by the World Bank and accurate until the end of 2014, South Africa’s total public and publicly guaranteed debt amounts to $57.87 billion. Foreign currency bonds make up $52 948 of that.
High levels of debt are perfectly normal and quite healthy in a developing country and absolute numbers are meaningless unless analysed in terms of ratios. The figures to watch out for are those that show the likelihood of South Africa defaulting on its debt and those that give an idea of how much of a drain the debt repayments are on the local economy.
No role model
Compared with other newly industrialised countries – South Africa’s peer group in terms of similar levels of development – South Africa is no role model, but it is certainly not falling behind.
As a percentage of gross national income (GNI) – gross domestic product plus foreign income – public and publicly guaranteed debt stands at 17 percent. This is higher than the sub-Saharan Africa (SSA) average of 14.8 percent and Turkey’s 13.1 percent, but similar to Indonesia’s 16.6 percent and far better than Brazil whose debt is three-quarters of its GNI.
Foreign debt is serviced using foreign income and it is more telling to look at debt levels compared with exports. South Africa’s public and publicly guaranteed debt is 49.5 percent of total export income. Indonesia, Brazil and the SSA average are all substantially higher and Turkey is comparable at 46.6 percent.
As an annual expense, however, the cost of servicing public and publicly guaranteed debt (including principal and interest payments) in South Africa is 31.6 percent of what it earns via exports. This is where it shows its vulnerability. This burden remains lower than that of the SSA average at 40.4 percent and Brazil at 45 percent, but it is far higher than that of Indonesia at 6.4 percent and Turkey at 5.2 percent.
Almost a third of our export earnings are being used just to pay the costs of debt rather than being reinvested into the local economy. That would be fine if it indicated that South Africa was paying back its debt, but it is not – principal repayments amounted to only 2.1 percent of the total public and publicly guaranteed debt in 2014. Debt must obviously be seen in light of its purpose – South Africa may never have reached its level of wealth and ability to export without it – but the credit rating has a large impact on debt repayment.
Governments very often do not pay back their debt, choosing to refinance it and borrow again. However, if we go through another credit rating downgrade, the cost of financing the debt will rise and an even larger portion of our foreign earnings will be drained to service the interest payments.
* Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision Making course. Follow him on LinkedIn /in/pierreheistein.
** The views expressed here do not necessarily reflect those of Independent Media.
BUSINESS REPORT