If debt, like greed, is good, aka that sociopathic asset-stripper Gordon Gekko in the film Wall Street, borrow on. National treasuries and debt management offices, and their bosses, the ministers of finance, are always under political pressure to borrow more from the money markets to fund national Budget shortfalls, partially as a consequence of a lower-than-required tax base and therefore revenues; inefficient tax collection due to capacity, institutional and human capital deficits – all features of the public finance landscape of Low-and-Medium-Income Countries (LMICs).
Raising income, corporation and VAT is an option, but are beholden to electoral cycles in democracies and economic downturns such as the global cost-of-living crisis that has clobbered economies, societies and individuals over the past four years as a result of the Covid-19 pandemic; the supply chain disruptions of the Ukraine conflict, especially their negative impacts on fuel and food supplies and prices; and the resultant global economic crisis fuelled by high inflation, slow recovery, subdued gross domestic product (GDP) growth and inward foreign direct investment flows.
The dreaded two-headed hydra of limited fiscal space and extended drag inevitably come into play, setting finance ministers in a quandary about their policy options. For emerging markets , this is particularly so because of their inability to raise revenues from a wider base which, in turn, impacts their revenue-to-debt servicing ratio.
There is also the ruling party pressure to be more generous in handing out social grants and wider safety nets – often unaffordable and unsustainable – especially when a general election looms in 2024, as in South Africa.
In November, Team Godongwana were adding to the debt burden, let alone the financial sustainability of the economy and country. At the end of November, the Treasury raised R20.4bn ($1.1bn) from the domestic markets through a four-tranche rand-denominated Sukuk issuance. A week earlier, he raised $1.3bn in two forex concessional loans – $1bn from the World Bank and $300 million from the African Development Bank, and took a €500m (R10bn) loan from Kreditanstalt für Wiederaufbau, the German development bank to support South Africa’s commitment to just transition to a low-carbon and resilient economy and “for general budget expenditure purposes”.
This means that in November alone, the National Treasury added R55.25bn ($2.94bn) to South Africa’s debt burden, of which $1.54bn (R29.2bn) are in forex loans. In the riposte, said The Treasury: “These facilities enable (us) to raise funding at very affordable rates which help to reduce the government public debt.” The Treasury rationale seems to amass cheaper concessional funds from development partners but in this instance, it is ring-fenced to the “government’s key reforms under climate change and the electricity sector dynamics”.
Climate finance activists are calling for innovative debt swops for climate, nature and clean energy projects to help address the debt crisis in many LMICs. Whether this gains traction for South Africa, remains doubtful.
The elephant in the room is the country’s insatiable appetite for funds, especially by state-owned entities such as Eskom and Transnet. Following on from the R254bn Eskom bailout through the Eskom Debt Relief Amendment Bill, Godongwana approved a whopping R47bn guarantee facility to troubled Transnet on December 1, “in support of its recovery plan including meeting its immediate debt obligations”.
R22.8bn was disbursed immediately to settle maturity debt obligations.
Despite the “strict guarantee conditions”, it does not augur well for the government’s goal of inclusive growth, and despite Godongwana and Public Enterprises Minister Pravin Gordhan optimism that Transnet’s importance to the economy would be restored.
In the South African context, it is debt sustainability, structural economic and fiscal reforms and policy sanity that will support long-term GDP growth and sound public finances.
* Parker is an economist and writer in London
Cape Times