South Africa’s massive ‘fundability’ problem

South Africa is facing a massive funding problem, following the outbreak of the Covid-19 pandemic, and subsequent lockdown of the country, which requires new sources of revenue to plug the growing funding gap.

According to Intellidex analyst Peter Attard Montalto, National Treasury needs to adopt a new mindset to tackle this problem head-on, which requires an emergency budget to be tabled, and new pools of capital to be tapped.

The problem

When a country faces an economic and financial credibility crisis, the issuing of new debt for financing should be minimised, Attard Montalto said.

However, when there is a national health crisis – as is being experienced in South African and many other markets – spending (in that area but also on economic support) should be maximised, which, by implication, means it is unlikely that issuance can be minimised unless there is significant fiscal space.

In reality this means huge spikes in issuance, he said.

“What on earth happens if you have both sorts of crisis at the same time? This is where we find ourselves now and where we see National Treasury only now just starting to find its feet,” the analyst said.

What can be done

Attard Montalto noted that there are many mechanisms a government can use to address fundability – each coming with its own pros and cons, and resultant impact.

This includes measures like prescribed assets (large impact on negative fundability due to chasing investors away) or SARB quantitative easing (highly significant impact on positive fundability, but possibly a last resort).

South Africa currently faces a funding gap of R119 billion for the three-week lockdown, which could go as high as R354 billion if it is extended to nine weeks.

The total funding requirement this year will be R1.2 trillion for a 21-day lockdown – or R1.4 trillion for a nine-week lockdown, Attard Montalto said.

While Treasury has some room to borrow off-market and to deliver an emergency budget to move money around – in order to make up the deficit, and maintain the minimum of R200 billion in cash, it will have to issue new debt.

This would have to be an increase of 50% for a three-week lockdown, Attard Montalto said, or 100% for a nine-week lockdown. It was previously assumed that a 15% increase was coming.

“So how much more can Treasury issue? The simple answer to the question is that, at sustainable debt levels, Treasury can’t issue any more debt at all,” Attard Montalto said.

“As such real quantitative easing is likely, eventually, needed to flatten the yield curve and prevent a fiscal credibility crisis spiralling out of control and market access being lost,” he said.

However, he added that this eventuality is considered to be “far off”, as it is believed that the South African Reserve Bank would want to first exhaust all other avenues for sources of funding, potentially even approaching the International Monetary Fund (IMF).

Political blockages

While finance minister Tito Mboweni has said the government could consider approaching the International Monetary Fund for assistance to fight the pandemic – this view is not shared by senior officials in the governing ANC party and its allies.

Senior ruling coalition officials have strongly rejected that option on the grounds that the nation’s sovereignty would be undermined.

In a statement out earlier this week, ANC secretary general, Ace Magashule, Cosatu general secretary Bheki Ntshalintshali, and Solly Mapaila, first deputy general secretary of the South African Communist Party, said that  South Africa’s right to determine its own policies “is non-negotiable, even in the midst of a crisis”.

It is widely documented how the ANC’s political faction, led by Magashule, has deviated from its government leaders in president Cyril Ramaphosa and his ministers on many hot-button issues – and even amid the crisis, this divisive trend continues.

Magashule and the ANC alliance partners want the SARB to play a bigger role in reviving the economy, and have urged the government to explore how to secure more sources of domestic funding, including tapping retirement funds.

Vocal factions within the ANC have long been pushing for prescribed assets, the nationalisation of the Reserve Bank, and the infamous “quantity easing” as a silver bullet for South Africa’s financial woes.

Economists have consistently warned against this direction, saying it would have the opposite effect, by pushing external funding sources away from the country.

“(Prescribed assets) creates foreigner flight and huge uncertainty and legal risk amongst local investors,” Attard Montalto said.

He described it as a beartrap, in that it’s “believing that forcing people to buy your bonds solves the fundability problem”.

Read: 5 government-backed financial relief measures that South African businesses may not know about