Responding to a disaster doesn’t give National Treasury more alternatives
JOHANNESBURG – South Africa’s debt is on an unsustainable trajectory and there are limited alternatives for the National Treasury after Moody’s Investors Service downgraded the Government of South Africa’s long-term foreign-currency and local-currency issuer ratings to Ba1 from Baa3.
The outlook remains negative. In the 2018/19 financial year, South Africa’s national debt exceeded R3 trillion. It is expected to rise to R4.5 trillion in the next three years. The country recorded a government debt equivalent to 62.2 percent of the country’s gross domestic product (GDP) in 2019.
South Africa’s borrowing from the BRICS Bank 2019 totalled about $2 billion (R36 billion), representing about 16 percent of the total amount of $12.5 billion which the bank has lent to the five members of BRICS, according to the New Development Bank website.
The proposed suggestions by Minister of Finance, Tito Mboweni gives the nation a rich picture of the government’s financial position that is obviously not attractive and its inability to respond to the economic challenges and the coronavirus pandemic.
South Africa’s suggestions to approach the International Monetary Fund (IMF) and World Bank for funding to fight the coronavirus that threatens to drag the country’s economy deeper into recession are part of the interventions and mechanisms to reduce the impact of this disastrous economic crisis we are experiencing. A reflective leader assesses the implications of the future economic challenges the country can face and draw it to our attention, putting the situation to the public to understand where we are, its inclusiveness as a responsible leader.
Capital raising when you are experiencing an unexpected natural disaster twinning with the junk status on the first day of the Covid-19 lockdown, on Friday, does not give the Treasury much room to proactively prepare an investment memorandum for targeted investors, but they have to move in speed to reactively deal with the situation as it is disastrous.
“We take no ideological position in approaching the IMF and World Bank. They are creating facilities for this environment and South Africa should also take advantage of those facilities in order to relieve pressure on the fiscus,” said Mboweni.
As South Africans, we need to proactively share solutions that can help rebuild the country. Withholding novelty solutions will not assist the economy at this point in time. This economic crisis and disastrous health crisis need all of us to unite.
The IMF’s financial resources are made available to its members through a variety of facilities and policies, which differ mainly in the type of balance of payments needs that they address and in the degree of conditionality attached to them. The rules governing access to the IMF’s general resources apply uniformly to all members. The structural adjustment facility provides loans to support the medium-term macroeconomic and structural adjustment programmes of low-income developing member countries with protracted balance of payments problems.
Subdued private investment and exports, and increased uncertainty have depressed growth and worsened social indicators. State-owned enterprises’ (SOEs’) risks are kicking in, triggering government bailouts of Eskom and administrative intervention in other entities. High fiscal deficits have boosted debt.
Non-resident investors are shedding equity and local currency bonds but showing an appetite for foreign currency sovereign bonds amid supportive global financing conditions. The external position is moderately weaker than implied by fundamentals and desirable policies. Inflation has slowed to around the mid-point of the target band, aided by one-off factors, but inflation expectations are higher. Banks are sound, albeit with pockets of vulnerabilities.
South Africa suffers among the highest levels of inequality in the world when measured by the commonly used Gini index. Inequality manifests itself through skewed income distribution, unequal access to opportunities, and regional disparities. Low growth and rising unemployment have contributed to the persistence of inequality.
The IMF assists countries hit by crises by providing them financial support to create breathing space as they implement adjustment policies to restore economic stability and growth. It also provides precautionary financing to help prevent and insure against crises.
South Africa is experiencing both the domestic crisis for our current economic situation that led to our sovereign investment grading downgraded, speculative and also the external factors that are natural disasters, as well as the Covid-19 pandemic, spread globally that has affected more than 200 000 people and taken lives in many countries.
Domestic factors include inappropriate fiscal and monetary policies, which can lead to large economic imbalances (such as large current account and fiscal deficits and high levels of external and public debt); an exchange rate fixed at an inappropriate level, which can erode competitiveness and lead to persistent current account deficits and loss of official reserves; and a weak financial system, which can create economic booms and busts. Political instability and/or weak institutions can also trigger crises by exacerbating economic vulnerabilities.
The rand weakened to a record low, dollar bonds plunged and banking stocks dropped after the country lost its last investment-grade credit rating. The domestic currency dropped as much as 2.5 percent to R18.09 a dollar, on Monday, breaching R18 for the first time. The rand was trading at R17.95 against the dollar at 3pm on Tuesday. The fixed foreign exchange at R17.50 to R18.09 will negatively impact the economy, mainly when the rand strengthens to about R14 to R15 against the dollar.
External factors include shocks ranging from natural disasters to large swings in commodity prices. These are common causes of crises especially for low-income countries, which have limited capacity to prepare for such shocks and are dependent on a narrow range of export products. Also, in an increasingly globalised economy, sudden changes in market sentiment can result in capital flow volatility. Even countries with sound fundamentals could be severely affected by the impact of economic crises and policies in other countries.
IMF managing director Kristalina Georgieva’s statement following a G20 ministerial call on the coronavirus emergency said: “Advanced economies are generally in a better position to respond to the crisis, but many emerging markets and low-income countries face significant challenges. They are badly affected by outward capital flows, and domestic activity will be severely impacted as countries respond to the epidemic. Investors have already removed US$83 billion from emerging markets since the beginning of the crisis, the largest capital outflow ever recorded. We are particularly concerned about low-income countries in debt distress — an issue on which we are working closely with the World Bank.
“We are concentrating bilateral and multilateral surveillance on this crisis and policy actions to temper its impact. We will massively step up emergency finance — nearly 80 countries are requesting our help — and we are working closely with the other international financial institutions to provide a strong coordinated response.”
Executive Directors welcomed the opportunity to review the interest rates charged on credits extended from the Poverty Reduction and Growth Trust (PRGT). They agreed to align the mechanism for determining interest rates to be charged on credit provided, however, South Africa is not a low-income country or in a category for the poverty reduction and growth trust.
Five things worth weighing when borrowing from the international monetary fund (IMF) are:
- When the nation has the Finance Minister and President that they trust, borrowing funds will not be a challenge as the funds will be used for the purpose it was requested for. Holding leadership accountable will be necessary for them to work together in restructuring the economy and ensure that the committed investments spur economic growth to enable the country to repay debts.
- The current position of the South African foreign exchange is not good for the country, as we will get funds on a fixed foreign exchange and the rand is trading at 18.95 against the dollar today.
- IMF debt repayments before the end of their term. Leadership changes cannot be predicted and South Africa has learned so much about leadership the past ten years.
- South African national debt is still below 70% to our country GDP and we can borrow funds when we are facing a crisis like now. There is a strong reason to seek financial help as the situation can worsen to an unmanageable stage.
- The Forecast for revenue collection from corporates and Pay as you earn ((PAYE), will be lower for the next collection period, April 2021.
Miyelani Mkhabela is an Economic Strategist and Director for Antswisa Transaction Advisory Services, Contactable at: [email protected] | +27 61 4433 199 | Twitter:@miyelani_hei