South African government debt to GDP is fast approaching 60%, according to the International Institute of Finance (IIF), sounding alarm bells over the country’s ability to finance it.
An increase in government debt has pushed South Africa to the largest change in emerging market debt-to-GDP year-over-year in all of Sub-Saharan Africa, the IIF said, making it the fifth-largest difference among the emerging markets assessed.
With EM household and government debt reaching record highs, the rise in overall debt-to-GDP ratios since Q1 2018 has been most significant in Chile, Korea, Brazil, South Africa, Pakistan and China, it said.
Emerging market debt hit a record $69 trillion in the first quarter of 2019, the IIF said, now amounting to over 216% of GDP for the market.
“The persistent economy-wide increase in EM borrowing continues to feed into higher contingent liabilities for many sovereigns,” said IIF deputy director Emre Tiftik.
“Growing reliance on short-term debt leaves many emerging markets exposed to sudden shifts in global risk appetite.”
According to NWU Business School economist professor Raymond Parsons alarm bells are ringing for South Africa debt-to-GDP ratio, with Treasury at high risk of having to reprice its debt.
“The original Budget projections in February this year were predicated on an expected 1.5% growth in 2019, which is clearly no longer realistic, given the poor economic growth performance in the first half of 2019,” he said.
For South Africa, government debt has long been the axe hanging over the country’s credit rating neck, which is being held up by a single thread in the form of Moody’s.
Moody’s is currently the only major ratings agency to hold South Africa in investment grade, after both S&P Global and Fitch junked the country’s rating two years ago.
A cut by Moody’s to sub-investment grade would force South African bonds out of the World Government Bond Index (WBGI), forcing investors and hedge funds to pull their funds out of the country.
It is estimated that around R100 billion worth of investment has been fed into the country through the WBGI since South Africa joined in 2012.
Moody’s has granted South Africa a reprieve on many reviews, but has also explicitly warned against rising debt levels, as well as the core underlying causes which include low growth, failing state owned companies and policy uncertainty.
In its most recent review, the ratings firm cut South Africa’s growth forecast to 1.0% – higher than the 05% to 0.8% held by many financial institutions – after the country posted the biggest quarterly decline in a decade.
It warned that in this economic environment government’s stated goals of boosting the economy would be far more difficult to achieve, and even warned of a high chance of the country entering into a recession yet again.
However, despite Moody’s still keeping South Africa above junk, economists and analyst are under no illusions that the country is actually at investment grade, with the base expectation being that a downgrade to full junk is inevitable.
Despite South Africa’s woes on the debt front, its currency is enjoying renewed levels of strength, pointing to rising debt and the looming threat of a downgrade already being priced into the market.
According to analysis by Bianca Botes, treasury partner at Peregrine Treasury Solutions, much of the rand’s movement over the last month has been at the behest of international markets and manoeuvring, particularly the in the US, where the Federal Reserve pointed to rate cuts, reigniting investor appetite for riskier EM markets, and president Donald Trump pushed his trade war.
More recently, strong retail sales data in the US this week saw the rand retreat against the dollar after reaching highs of R13.85/$ during trade on Tuesday, but the currency is still expected to stick around the R14 to the dollar levels, she said.
Helping the rand locally has been the promise of continuity at the South Africa Reserve Bank, with governor Lesetja Kganyago being reappointed for another five-year term, along with movements from government to help struggling SOEs – in particular, Eskom.
National Treasury is expected to lay out its plan to save Eskom in the presentation of the Special Appropriations Bill on the 23rd of July. Eskom presents the biggest risk to the fiscal framework due to its financial problems and negative impact on the lives of ordinary South Africans.
Also working in South Africa’s favour is the anticipation of rate cut on Thursday (18 July).
By 10h00 on Wednesday the rand was trading at the following levels against the major currencies:
- Dollar/Rand: R13.98 (0.12%)
- Pound/Rand: R17.33 (0.12%)
- Euro/Rand: R15.67 (0.15%)