South Africa’s government will soon be going to the capital markets in a bid to raise additional debt to fulfil the 2023/24 financial year’s budget requirements as the state scrambles to cut spending on the back of deteriorating fiscal metrics.
This will likely raise the national debt burden beyond the R4.73 trillion mark, widen the budget deficit above 4.2% of gross domestic product (GDP,) and threaten the budget surplus in the medium-term.
The National Treasury has already increased government borrowing to R2 billion a day from the beginning of August to fund its current fiscal deficit and refinance maturing debt on the back of declining tax revenue.
The Treasury said on Friday that it would be reopening the inflation-linked bond for additional funding for this financial year’s borrowing requirements.
Inflation-linked bonds are debt securities designed to help investors defend the purchasing power of their capital against inflation.
They are “indexed” so that the principal and interest payments rise and fall in line with inflation, guaranteeing an above-inflation return if the bond is held to maturity.
Treasury’s director for debt issuance and management, Terry Bomela-Msomi, on Friday said that they used a wide range of instruments to finance the government’s borrowing requirements.
Bomela-Msomi said in order to manage certain risks, the issuance of some of these instruments was suspended and re-opened when necessary, at the discretion of the National Treasury.
“As such, the National Treasury will be reopening the R202 (3.45%; 2033) inflation-linked bond,” Bomela-Msomi said.
“The instrument will be used as an additional funding tool for the remainder of the 2023/24 fiscal year.”
Bomela-Msomi did not divulge as to how much the Treasury was aiming to raise through this bond and what maturity dates would be set.
The total value of South African government inflation-linked bonds listed on the JSE is currently R760billion, compared with R2.05 trillion of South African government-issued nominal bonds.
This comes as the Cabinet last week confirmed that Finance Minister Enoch Godongwana will be publishing the guidelines for the proposed budget cuts as Treasury looks to austerity measures on the back of rising constraints on the fiscus ahead of the Medium-Term Budget Policy Statement (MTBPS) on November 1.
The Cabinet has resolved that all departments, constitutional institutions and public entities listed in Schedule 2 and 3 to the Public Finance Management Act (PFMA), (Act 1 of 1999) must implement measures to contain operational costs and eliminate all non-essential expenditure.
A number of organisations have raised objections against the circular to all government departments and provinces instructing them to slash budgets by up to 15%, freeze all vacancies and infrastructure roll-out programmes as part of policy of fiscal consolidation.
The South African Institution of Civil Engineering (Saice) on Friday suggested an alternative solution to assist the Treasury as it grapples with the country’s constrained fiscus.
In a letter sent to the Treasury’s Director-General, Dr Duncan Pieterse, Saice proposed a Public Private Partnership (PPP) solution, where the advisory fees for transaction advisers can be funded through a bridging loan from a bank, where the loan is repaid on financial close of the project taken from project funding.
Saice president Steven Kaplan said this innovative solution would enable the continued investment in the development of infrastructure needed to boost the economy, creating both jobs and enabling skills development.
“This concept, still in its initial development and testing phase, proposes that a bank, either the Development Bank of Southern Africa (DBSA) or a commercial bank, fund the adviser fees by means of a bridging loan for the planning and procurement phase of the project,” Kaplan said.
“The bank loan would be repaid in a single tranche, on first drawdown, when the private party achieves financial close. This would make the loan a relatively short-term loan, usually less than two years, to provide the bridging funding required to meet the Transaction Adviser fees.”
Last week, the Presidency said that "unsustainable public debt levels", including low growth rates, were forcing President Cyril Ramaphosa to consider cutting the government's size to stabilise the economy.
The Presidency said public-sector expenditure cuts would be prioritised over the next nine months to restore confidence and bolster the growth strategy going forward.
Some of the other measures being weighed to shore up the fiscus include hiking value-added tax (VAT) by two percentage points to allow for the continuation of the Social Relief or Distress Grant (SDG) beyond March 2024.
Labour unions have threatened to hold a nationwide strike to voice their opposition to the possibility of a further wage freeze, job cuts, and more cuts to government services.
Oxford Economics Africa head of macros, Jacques Nel, said budget issues were affecting politics in South Africa as trade unions have started talking about a general strike in response to austerity measures, possibly including a VAT hike, that the Treasury intends to table in its MTBPS in November.
“Labour unions in South Africa have responded to rumours of deep cuts to government spending by threatening to put their members on the streets,” Nel said.
“President Cyril Ramaphosa has presented an image of a government engaging with organised labour over its plans, but unions are certain to put the squeeze on Godongwana as he applies the finishing touches to his MTBPS.”