Government borrowings in the 2017/18 year was R246bn, consisting of R217.3bn for the budget deficit and R28.7bn for debt repayments.
The rating agency projected that the 17sub-Saharan Africa sovereigns that it rated would borrow an equivalent of $57bn from long-term commercial sources this year, representing a 7.4percent increase in long-term commercial debt issuance compared with 2017.
Gardner Rusike, a credit analyst at S&P, said it forecasts an appreciation of the US dollar against the rand, which would affect South Africa’s overall borrowing and gross debt numbers expressed in US dollars.
“About 41.4percent of South Africa’s rand-denominated debt is held by non-residents, so exchange rate movements play an important part in non-residents’ decisions about whether to buy rand debt.
“Positively for the government, issuing in rand limits its repayment risks during periods of sharp depreciation - the risk lies with the buyers of the debt,” Rusike said.
S&P projections aligned with that of government. The Treasury in the 2018 Budget said in 2018/19, the total borrowing requirement would be R224.2bn.
The National Treasury in the Budget review said demand for government remained robust, despite two-sovereign credit rating downgrades last year. “Deep and liquid domestic markets will remain government's main source of borrowing. The debt portfolio remains well structured with an emphasis on longer-dated loans,” the Treasury said.
The Treasury plans to fund the expected borrowings through three mains sources.
These are short-term borrowings, consisting of Treasury Bills with maturities of 12 months or less.
Treasury would also tap into loans from the Corporation for Public Deposits and foreign-currency loans.
To diversify its funding sources, the Treasury said it would explore a rand-denominated Islamic bond in 2018/19.
In addition, the government said it will increase the variation in maturities across inflation-linked and fixed rate bonds by considering issuing a new bond in each category.
In another development, the Treasury said it was working with the Johannesburg Stock Exchange, the Reserve Bank, primary dealer banks and the World Bank to develop an electronic trading platform for government bonds.
“The pilot phase will be launched in the 2018/19 financial year. The platform is expected to increase liquidity and transparency, and to reduce funding costs by simplifying access to government bonds.”
A further sovereign credit-rating downgrade has been flagged as one of the main risk to government's financing strategy. A downgrade by Moody’s into a sub-investment grade rating would exclude South Africa from the Citi World Government Bond Index. This would trigger compulsory bond sell-offs by some institutional investors.
Jan Friedrich, an analyst at Fitch Ratings, said the Budget speech presented last week reversed some of the fiscal deterioration seen last year.
“However, the need to fund expenditure measures announced in recent months means the consolidation envisaged is relatively modest,” Friedrich said.
Dondo Mogajane, the director-general at National Treasury, has already said Fitch and Moody’s and S&P have all indicated their preliminary satisfaction with the contents of the Budget.
Fitch and S&P’s cut the country’s local debt rating to sub-investment in November, while Moody’s was due to announce its decision next month.
Kamilla Kaplan, an economist at Investec, said averting further credit rating downgrades over the longer-term will require a sustained economic growth recovery to 3percent and beyond.