SOUTH AFRICA COUNTRY DEBT PROFILE

Transcription

1 SOUTH AFRICA COUNTRY DEBT PROFILE Economic and Social Analysis South Africa experienced a long period of economic decline in the last decades of apartheid, with growth being particularly poor in the 198s and early 199s. Some of the reasons for the low growth during this period include increasing international isolation and civil conflict. However, post independence in 1994; economic growth was relatively impressive averaging 3.3% rate for real GDP and 1.7% in per capita terms for the period 1995 to 25. This growth trend was an improvement, as compared to the rates of the 1985 to 1994 period, where the respective average rates were.8 and 1.3%, as shown in fig 1 below. Economic growth picked up substantially from 24, averaging over 5% annually through 27. However in 28 economic growth slowed to 3.6% as a result of the global economic crisis. It actually worsened in 29 where a negative real GDP growth rate of -1.5% was experienced. However, it rebounded back and grew by 2.9%, 3.5%, 2.5% and 2.8% in 21, 211, 212 and 213 respectively. These growth rates have however remained below the annual average of 6% envisaged in the Accelerated and Shared Growth Initiative for South Africa (ASGISA) 1 Fig 1: GDP and GDP Per Capita Growth Rates, (constant 2 prices) Source: UNDP South Africa Although economic growth performance improved significantly since the late 199s and overall poverty levels have generally declined, inequality in income distribution is still high as indicated by the Gini index of 63.1% as of 29. According to the IMF 212 Article IV 1 ASGISA was launched in 26 as a coordinating framework to enable achievement of new government goals of halving unemployment and poverty between 24 and 214 1

2 Consultation Report on the country, educational attainment is low and, reportedly, high school graduates lack marketable and practical skills to work or set up a business. Furthermore, a large share of the population is reported to be lacking proper access to basic health. Nevertheless, South Africa is currently the largest sub-saharan African (SSA) economy, accounting for over a third of Sub-Saharan Africa s GDP and 4% of its exports 2. The country also has strong financial and trade links to the global economy, which implies that shocks to the global financial conditions rapidly filter into its domestic financial variables respectively, as was the case during the 29 global crisis. Evolution of National Public Debt in South Africa Upon attainment of independence after the first democratic elections in 1994, the new democratic South African government inherited an economy with fiscal and other macroeconomic balances. These were as a result of the weak economic growth that resulted from low investment and lack of investor confidence that contributed to lower revenue collection in the country, prior to the elections. Furthermore, political tension, combined with domestic and international recession at that time meant that the government could not introduce expenditure cuts, which necessitated high borrowing to meet the expenditures respectively. However, the new democratic government through its Growth, Employment and Redistribution (GEAR) strategy, aimed to reduce the conventional budget deficit/gdp ratio to below 3% per year, compared to the 7% level at independence. Specifically, the government reversed some of the increases in expenditure as a percentage of GDP, while improved growth and better tax administration also resulted in revenue growth. Continued fiscal discipline thus resulted in a small budget surplus a decade later in 26 and 27. Consequently, the improvement in the budgetary performance gave rise to a sharp reduction in the ratio of public debt to GDP since the mid 199s. As shown in Fig 2 below, the public debt /GDP ratio declined proportionately over the years, reaching 25.3% in 28 as compared to an average of 45% in the mid 199s. However, since 29, the public debt/gdp ratio started rising again as the government incurred fiscal deficits to provide countercyclical fiscal stimulus to combat the 28/9 global recession. As shown in fig 2 below, as of the end March 212, total public debt/gdp ratio had once again increased to 37.6% respectively. Fig 2: Evolution of National Debt, March 1994 March International Monetary Fund (IMF). South Africa 212 Article IV Consultation, page 46. 2

3 Rand Millions % Domestic Debt External Debt Total Debt as a % of GDP Source: Compiled from the Government Finance Statistics of South Africa: and the Reserve Bank of South Africa, June 213 Quarterly Bulletin Domestic Debt Analysis As shown in fig 2 above, there is a higher dependence on domestic debt than on foreign debt in South Africa. The exchange rate volatility associated with foreign currency debt is cited as a key risk factor in ensuring manageable foreign currency debt levels, and hence high domestic debt issues respectively. High dependence on the domestic debt market is also made feasible by the existence of a highly liquid and sophisticated bond market in the country 3. A snapshot of the domestic debt developments since 2, shows that, whereas moderate increases in the country s domestic debt stock were experienced between 24 and 28 (with an annual average increase of 5.2% ), trend analysis in fig 3 below reveals that there were significant annual increases in the country s domestic debt between 29 and 213 respectively. The country s national budget was generally balanced up to 28 implying limited need of borrowing domestically for national budget deficit financing purposes. However, due to the 28/9 global financial and economic crisis, budget deficits have been recorded since 29, resulting in significant increases in the country s domestic debt respectively. Consequently, the Domestic Debt/GDP ratio which had declined from 27.9% as of March 24 to 21.1% as of March 28, has also been on the rise reaching 33.9% as of March The need to develop the debt capital market was identified in the late 197s. However, the market remained under-developed up to 199. Concerted efforts to develop the bond market began post In order to promote the debt capital market and allow for self-regulation, a formal bond exchange-the Bond Exchange of South Africa (BESA) was formed in In 28, BESA was named the most innovative capital markets regulator in Africa at the Africa Investor index series awards in New York. 3

4 R Millions % Fig 3: Evolution of the Republic of South Africa Domestic Debt, March 24 March National Domestic Debt Stock Domestic Debt as a % of Total National Debt Stock Domestic Debt as a % of GDP Source: Compiled from the June 27, March 212 and June 213 Reserve Bank of South Africa Quarterly Bulletins Domestic Debt Instrument Composition Domestic debt instruments comprises of those that are used for short term borrowing purposes and those that are used for long term funding purposes. Short term borrowing consists of treasury bills and cash borrowings from the broader public sector through the Corporation for Public Deposits (CPD) 4. Treasury bills are sold at a discount to par and carry no coupon. They are issued to the market at different maturities, from one day to 12 months, and are redeemable at par on maturity. As of end of March 213, the outstanding treasury bills portfolio consisted of 91-, 182-, 273- and 364-days treasury bills. On the other hand, domestic long-term funding consists of fixed-rate and inflation-linked bonds. Fixed-rate bonds pay a fixed coupon rate until the redemption date while inflation-linked bonds provide investors with a direct hedge against inflation. The principal amount is adjusted according to changes in the headline inflation rate. Although the coupon rate is fixed, the interest payment is based on the inflation-adjusted outstanding amount. It is indicated in the country s 211/12 Debt Management Report that split between fixed-rate and inflation-linked bonds are informed by risk management guidelines. Out of all these instruments, bonds are more dominant, followed by treasury bills, short term loans and other debts respectively, as shown in fig 4 below. 4 CPD is a wholly-owned subsidiary of the Reserve Bank of South Africa. The corporation facilitates the banking arrangements of the Government and State Owned Companies with the Reserve Bank that allow for inter-lending among these entities with the approval of the National Treasury. 4

5 Rand Millions Fig 4: Outstanding Domestic Debt Instrument Composition, March 28 March Treasury Bills Bonds Short-Term Loans Other Debt Source: Compiled from the June 213 Reserve Bank of South Africa Quarterly Bulletin Between March 28 and March 213, all outstanding treasury bills were marketable. For bonds, 99% were marketable while the remaining 1% was non marketable (source) Holders of Outstanding Treasury Bills As shown in fig 5 below, the holders of outstanding treasury bills are the monetary authorities 5, banks and other holders 6, with the banks 7 being the dominant holders, followed by other holders and the monetary authorities respectively. 5 Monetary authorities include the South African Reserve Bank and the Corporation for Public Deposits (CPD) 6 Includes domestic bonds held by non-residents 7 As of March 212, The Standard Bank at 2% led all the banks in the holding of outstanding treasury bills, followed by the First Rand Bank(18%), Investec (14%), Nedbank (12%), ABSA (9%) and HSBC (7%). 5

6 Rand Millions Fig 4: Holders of Outstanding Treasury Bills, March 28 March Monetary Authorities Banks Other Holders Source: Compiled from the June 213 Reserve Bank of South Africa Quarterly Bulletin Holders of Outstanding Bonds The holdings of outstanding bonds can be divided into two groups mainly the holders of short term bonds (with an outstanding maturity not exceeding 3 years) and long term bonds (with outstanding maturity exceeding 3 years). As depicted in fig 5 below, the Public Investment Corporation, Reserve Bank of South Africa (SARB), Banks and the Non Monetary Private Sectors are the owners of the outstanding short term bonds. However, the Public Investment Corporation has decreased its holdings from 38.3% of the total outstanding stock of short term bonds as of end March 28 to 3.3% as of end March 213. On the other hand the non monetary private sector has been increasing its acquisition of short term bonds, with its holdings increasing from 13.3% as of end March 28 to a high of 45.6%. Banks are overally the dominant holders in this category, holding an annual average of 51.8% of the total short term bonds during the same period. It was only in 212, when they lost their dominance to the non monetary private sector. However, as of end March 213, they had regained their position, holding 51.3% of the total outstanding short term bonds. 6

7 Rand Million Rand Million Fig 5: Holders of Outstanding Short Term Bonds, March 28 March Public Investment Corporation Banks South Africa Reserve Bank Non Monetary Private Sector Source: Compiled from the June 213 Reserve Bank of South Africa Quarterly Bulletin In contrast to the holding of short term bonds where the banks are the dominant holders, the non monetary private sector are the main holders of long term bonds, holding an annual average of 56.6% of the total outstanding long term bonds between March 28 and March 213 as shown in fig 6 below. The Public Investment Corporation came second holding 3.6%, followed by the banks and the Reserve Bank of South Africa at 11.7% and 1.2% respectively. Fig 6: Holders of Outstanding Long Term Bonds Public Investment Corporation Banks South Africa Reserve Bank Non Monetary Private Sector Source: Compiled from the June 213 Reserve Bank of South Africa Quarterly Bulletin 7

8 % External Debt Analysis External debt in South Africa is comprised of marketable and non-marketable debt. Marketable loans include foreign currency bonds8 issued on the international capital markets whereas multilateral loans and export credit agency funding are examples of the nonmarketable foreign loans. As shown in fig 7 below, marketable loans are the more dominant of the two and actually increased from an average dominance of 68% between 28 and 29 to an average of 82% between 21 and 213 respectively. Fig 7: Decomposition of Foreign Currency Debt, March 28 March Non-marketable Marketable Source: Compiled from the Reserve Bank of South Africa, June 213 Quarterly Bulletin Data Regardless of the increases in the country s stocks of long term debt, it is notable that the country consistently remained without any principal arrears on its long term debt between 2 and 211. Impact and Sustainability of Debt on the South African Economy More developed, varied and accessible domestic financial markets are identified to be supportive of economic growth. Consequently, countries with higher levels of domestic financial development were found to grow faster by about.7% a year than those with undeveloped ones 9. Generally, this applies to the South African economy, which as alluded to above has a deep, liquid and sophisticated bond market. Using the ratio of Broad Money to GDP as a measure of the depth of the financial sector which also dictates the scope for the expansion and depth of the domestic debt market, fig 8 below shows that South Africa s is one of the few countries in Southern Africa whose Broad Money to GDP ratio exceeded the 5% 8 Foreign currency bonds are also issued for benchmarking purposes, to provide a pricing reference point for South African corporations and state-owned companies to borrow internationally. 9 CreaneS., Goyal R., Mobarak A, and Sab R. Financial development in the Middle East and North Africa, IMG, 23 8

9 % of GDP threshold 1 as of end 212, showing the high depth, liquidity and efficiency of the country s financial and/or domestic debt market respectively. 11 Consequently, the government of South Africa is thus able to meet a sizable portion of its national borrowing and/or funding requirements from the domestic capital market as compared to foreign sources of finance, as illustrated by the dominance of domestic debt in the country s total public debt portfolio in fig 3 above. Everything else being equal, this implies the self sufficiency of the government in meeting its development funding needs locally as compared to the reliance of external funding sources, which in the recent years have declined and have exposed the vulnerabilities of some Sub Saharan African countries that mainly rely on external sources of finance. Fig 8: Broad Money/GDP Ratio for selected SADC Countries as of end Assumed Threshold Source: Compiled from the individual countries Central Bank Annual Reports, 213 African Statistical Yearbook and other various sources The South African 211/12 Debt Management Report defines long term debt sustainability as the need to ensure that spending levels do not continually increase debt and interest costs. Using this definition, it is noteworthy that, the analysis from the interest costs perspective shows that there has been some good management and improvement respectively. As depicted in Fig 8 below, though national debt interest payments increased in nominal terms since 1994, it is notable that the burden of debt servicing on the economy has declined over the years as shown by the declining debt interest payments/ government revenue, debt interest payments/ government expenditure and the debt interest payments /GDP ratios respectively. The debt interest payments government revenue ratio reached a low of 8.9% in 29 as compared to a high of 23.6% in 1998 while the debt interest payments government expenditure ratio also 1 Benchmark of 5% is suggested by the IMF in its working paper titled What determines bond market development in Sub-Saharan Africa. 11 As of end March 213, the redemption schedule of the outstanding domestic marketable bonds showed a mixture of a variety bonds with redemption dates ranging between 226 and 251 9

10 Rand Millions % reached a low of 8% in 21 as compared to a high of 2.9% in Furthermore, the debt interest payments GDP ratio which only reached a high of 5.2% in 1999 has also been on the decline, reaching 2.4% as of 212. Holding everything else constant, the slowdown in the growth of debt interest payments creates room for scarce resources to be used for key socio-economic development projects in the country. Furthermore the burden of total debt on the economy was also well managed as indicated by the Total Debt/GDP ratio (fig 2 above) which persistently declined from an average of 4% in 1994 (and a high of 45% from 1996 to 1999) to 25.3% in 28. However due to the increase in debt accumulation in line with the need to finance the budget deficit as a result of the impact of the 28/9 global financial crisis, the Total Debt/GDP ratio has been on the rise since 29 reaching 37.6% as of end March 212. In the absence of a set Total Debt/GDP target/ benchmark, this increase necessitates the need for measures to keep the budget deficit under control and reduce the associated need to borrow respectively. Fig 8: National Debt Interest Payments, National Debt Interest Payments National Debt Interest Payments as a % of Government Revenue National Debt Interest Payments as a % of Government Expenditure National Debt Interest Payments as a % of GDP Source: Compiled from the December 1999 and June 213 Quarterly Bulletins of the Reserve Bank of South Africa and the Government Finance Statistics of South Africa: Legal and Institutional Framework Governing Debt Acquisition There is reference to public debt in the Constitution of the Republic of South Africa 1996 (Act No.8 of 1996) under Chapter 13 on Finance, subsection 215 (1) which states that National, provincial and municipal budgets and budgetary processes must promote transparency, accountability and the effective financial management of the economy, debt and the public sector and subsection 215 (3) (c) which states that budgets in each sphere of government must 1

11 contain - an indication of intentions regarding borrowing and other forms of public liability that will increase public debt during the ensuing year. Consequently, the Public Finance Management Act (PFMA) 1999 (Act No 1 of 1999) is the major piece of legislation that give effect to the sections of the Constitution that require national legislation to establish and prescribe measures to ensure transparency and expenditure control in all spheres of government, and to set the operational procedures for borrowing, guarantees, procurement and oversight over the various national and provincial revenue funds. Since the PFMA only apply to national and provincial government institutions, which include national and provincial departments, and the entities under their ownership control, there is the Municipal Finance Management Act (MFMA 23) which covers the local government. According to the PFMA, only the Minister of Finance may borrow money, or issue a guarantee, indemnity or security. The Minister may borrow money to finance national budget deficits; to refinance maturing debt or a loan paid before the redemption date; to obtain foreign currency; to maintain credit balances on a bank account of the National Revenue Fund; to regulate internal monetary conditions should the necessity arise; or any other purpose approved by the National Assembly by special resolution. A public entity authorized to borrow money must annually submit to the Minister a borrowing programme for the year and may not borrow money in a foreign currency above a prescribed limit. The repayment of money borrowed, the interest payable on the money borrowed, and any costs associated with such borrowing are direct charges against the National Revenue Fund. According to the MFMA, a municipality may incur either short-term or long-term debt to bridge shortfalls or capital via a resolution of the municipal council, signed by the mayor, who has approved the debt agreement; provided the accounting officer has signed the agreement or other document, which creates or acknowledges the debt to be repaid from specific funds to be received from enforceable allocations or long-term debt commitments. An analysis of the framework for citizen participation in loan contraction of the above shows that, the MFMA has specific provisions for citizen engagement on municipal borrowing. It stipulates that for long-term debt, the accounting officer has at least 21 days prior to the meeting of the council at which approval for the debt is to be considered, to make public an information statement setting out particulars of the proposed debt, including the amount of the proposed debt, the purposes for which the debt is to be incurred and particulars of any security to be provided. The public, National Treasury and the relevant provincial treasury must be invited to submit written comments or representations to the council in respect of the proposed debt. However, unlike the MFMA which is very clear on citizen and/or public participation and engagement, the PFMA does not create the same opportunities for citizen engagement on the debt management framework at national level, it is silent and has no section on such public engagement. However, in the 212 Budget Review, the Minister of Finance announced that the National Treasury, which is responsible for managing the finances of the national government, would begin to publish annual reports on South Africa s public debt management as part of the national treasury s commitment to transparency. Consequently, a report which covers the 211/12 fiscal year was the first and only report published to date. 11

12 Conclusions and Recommendations Though South Africa s Total Debt/GDP ratio has started rising since 29, it is notable that good fiscal management in the country since 1994 helped in the improvement and overall decline of this ratio respectively. It is also noteworthy that with a total public debt ratio of 38% as of end March 212, the country s total debt ratio was still below the SADC Convergence target of 6%. However, the recent increase of this ratio brings to the fore the fact that the country does not have a clearly set public debt/gdp benchmark as is the case with other South African countries such as Botswana that have their own statutory debt limits that are actually below the SADC convergence target. Though the determining of an appropriate benchmark for a country like South Africa can be very controversial, it is pertinent that the country establishes such a benchmark. This is also critical given the IMF s projections that there is a 1% chance that the country s Debt-to-GDP ratio could reach 63% by 22.In this view, the international monetary authorities recommends that reducing the debt-to-gdp ratio to around 4% by 22 would allow the country to rebuild adequate fiscal space. Regardless of the impressive economic growth, well developed domestic bond markets and developed physical infrastructure that the country is well known in the Sub Saharan African region, it is of concern that high inequality, poverty and unemployment are still major issues in the country. Using the human rights approach definition of debt sustainability which says that debt are only considered sustainable when the debt service burden leaves a country with sufficient funds to meet its human rights obligations under the internationally agreed MDGS, the South African government is recommended to devote more resources to address these imbalances respectively. However, this needs to be done in a way that will not compromise both debt and fiscal sustainability. 12