An upward revision of debt-to-GDP ratio

File photo: Siphiwe Sibeko.

File photo: Siphiwe Sibeko.

Published Oct 22, 2015


Johannesburg - The downward revision to gross domestic product (GDP), shortfalls in revenue and the weaker exchange rate had led to an upward revision of the debt-to-GDP ratio, Finance Minister Nhlanhla Nene announced in his mini budget yesterday.

“Government’s central fiscal objective over the medium term is to stabilise the growth of debt as a share of GDP. Continued revenue growth and strict adherence to the planned expenditure ceiling are projected to result in gross debt stabilising at 49.4 percent of GDP in 2018/19,” Nene said.

He said continued restraint in expenditure growth had resulted in net debt stabilising at 45.7 percent of GDP in the 2019/20 fiscal year, adding that gross debt was expected to stabilise below 50 percent of GDP over the medium-term expenditure framework.

Following the 2008 recession, government debt has increased from about 26 percent of GDP to 47 percent in March.

R2.4 trillion

The government’s gross debt stock was projected to increase by about R600 billion over the next three years, reaching R2.4 trillion in the fiscal year ending February 2019.

“Debt management is focused on mitigating the risks presented by the sharp increase in loan payments over the medium term and beyond. To meet these repayments, government will continue its bond-switch programme, through which short-dated bonds are exchanged for longer-dated paper,” Nene said.

He warned that continued global uncertainty, particularly concerning the path of US monetary policy, could put upward pressure on domestic interest rates, increasing the cost of issuing debt.

Level of debt

“Further rand depreciation and higher inflation would push up the level of debt and debt-service costs on bonds denominated in foreign currency and those linked to inflation,” Nene added.

Debt is a key issue that the rating agencies like Standard & Poor’s and Moody’s Investors Service keep an eye on. Nene said he did not expect any of the rating agencies to cut their view on South Africa’s ability to service its debt.

“We are staying the course of fiscal consolidation. There is no reason for the rating agencies to downgrade us. However, I can’t speak on behalf of the rating agencies,” he added.

Debt-service costs were expected to remain the fastest growing type of spending.

“Rising debt-service payments are already crowding out spending on social and economic priorities. Failure to stabilise the growth of public debt would further erode the composition of spending and increase the risk of a shock to the economy,” he added.

“A ratings downgrade, for example, could induce a sudden outflow of foreign capital and sharply higher interest rates. Given South Africa’s reliance on foreign lending to finance investment, such a development would compromise the country’s ability to sustain growth and social progress,” Nene said.

Debt-service costs were expected to increase by 10.9 percent a year over the four fiscal years ending February 2019.

He said the government was forecasting that it would spend R127.9bn on debt-service costs or 9.3 percent of total state expenditure for the year ending February 2016.

He said by the fiscal year ending February 2019, debt-service costs were set to rise to R174.6bn or 10.3 percent of total state expenditure.


“In these unsettled times, growing public debt makes South Africa vulnerable to shocks that could set back our prospects for faster growth over the long term. It also diverts spending from social and economic priorities to service rising interest payments,” Nene said.

“Managing these risks in the current environment requires closing the gap between revenue and expenditure, and making the most of the resources at hand – which amount to more than R4 trillion over the next three years.

“To ensure sustainable public finances that are not overwhelmed by debt and interest payments, spending limits will remain in place.

“Over the medium-term, debt continues to stabilise and the budget deficit falls to 3 percent of GDP.”

Nene said the expenditure ceiling remained the government’s primary tool to stabilise debt. “The proposal is that the spending ceiling should be linked to South Africa’s long-term economic growth projections,” he said.

“No resources will be added to the spending ceiling over the next two years.”


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