South African Budget Signals Debt Trap Ahead
South Africa is heading for a debt trap as bailouts for the embattled state power utility drain the government’s coffers and anemic economic growth weighs on tax revenue.
Finance Minister Tito Mboweni presented a rapidly deteriorating outlook in his medium-term budget policy statement on Wednesday, with gross government debt seen surging to 80.9% of gross domestic product in the 2028 fiscal year unless urgent action is taken. The trajectory is almost 20 percentage points higher than forecast in the February budget and shows no sign of stabilizing. The fiscal deficit will peak at an 11-year high of 6.5% of GDP next year. That’s 2.2 percentage points higher than the February estimate.
“The food cupboards are almost bare,” Mboweni told lawmakers in Cape Town. “The consequence of not acting now would be gravely negative for South Africa. Over time, the country could likely face mounting debt-service costs and higher interest rates and may enter a debt trap.”
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Eskom Holdings SOC Ltd., which produces about 95% of South Africa’s power, bears much of the blame for the bleak picture. It has been allocated 138 billion rand ($9.4 billion) in aid over the next three years to remain solvent, and upended efforts by President Cyril Ramaphosa’s administration to revive the economy because its dilapidated plants can’t meet electricity demand. Rolling blackouts caused economic output to contract the most in a decade in the first quarter, and prompted the Treasury to slash its growth forecast for this year to 0.5%.
Supporting Eskom leaves the government with less money to shore up growth, and, with the minister hinting at further tax increases next year, consumers probably won’t be able to help either. The Treasury expects the growth rate to average just 1.5% over the next three years.
“It is worrying for us,” said Tshepiso Moahloli, the Treasury’s head of liability management, in an interview. “If growth continues to lag and we continue to borrow, then you run out of space.”
The rand declined as much as 2.2% against the dollar after the statement, making the currency the worst performer among emerging-market peers. Yields on benchmark government rand bonds climbed to a two-and-a-half month high.
The higher debt numbers and weak expansion raise the risk the country will lose the stable outlook on its last investment-grade rating with Moody’s Investors Service, which is scheduled to publish an assessment on Friday. A switch to a negative outlook could be the precursor to a downgrade that would increase borrowing costs and trigger massive investment outflows.
The deteriorating debt and deficit forecasts “hammer home the troubles facing the government,” said Natalie Rivett, a senior emerging-markets analyst at Informa Global Markets in London. “This increase in debt under the weight of the Eskom bailouts, together with lingering uncertainty over Eskom debt restructuring and a weaker economic growth outlook, means a revision of the rating outlook from Moody’s to negative is a strong possibility.”
Treasury officials are set to talk with Moody’s and Fitch Ratings later today. Mboweni is expected to release an update of his growth plan soon.
The government is predicting it will collect 252.2 billion rand less in the three fiscal years through 2022 than was projected in February. And while it had expected to shave 28.8 billion rand off its wage bill over the period, the anticipated saving had to be reversed mainly because fewer workers agreed to take voluntary retrenchment than it hoped for.
“Stabilization involves difficult decisions that imply sacrifices by all of us,” Mboweni said. “Slowing growth in the compensation bill and additional revenue measures will be needed,” he said.
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