debt will be stabilised over the medium term and South Africa is far from a debt trap, according to the Budget Review.
It states that SA's deep and liquid domestic captial markets, and its access to international borrowing, continue to provide resources for government’s financing needs. Domestic capital markets will remain the main source of borrowing but over the medium term, government's borrowing strategy focuses on reducing the risks presented by the sharp increase in loan repayments beginning 2016/17.
Government’s foreign debt remains low, at 10% of gross loan debt. In 2018/19, gross bond issuance in the domestic market will be the lowest since 2011/12, reflecting the outcome of fiscal consolidation.
Global investors hold 32% of rand-denominated government bonds. Their holdings are sensitive to any shifts in US monetary policy and South Africa’s sovereign credit ratings.
Higher interest rates, rising inflation and the significant depreciation in the exchange rate, partially offset by higher cash balances, have resulted in higher net debt of R1.804trn in 2015/16 relative to the R1.781trn projected in the 2015 budget.
As the budget deficit improves over the medium term, net debt as a share of GDP is expected to stabilise at 46.2% in 2017/18, compared to 43.7% as projected in the 2015 budget.
Government issues guarantees to various state-owned companies. These guarantees will amount to R467bn as at March 31 2016. Of the total guarantee portfolio, 75% is issued to Eskom and 8% to the South African National Roads Agency Limited (Sanral). In 2015/16, one new guarantee for R2.5bn was issued to the South African Post Office (Sapo).
Only the portion of the guarantees that these companies have borrowed against – known as the exposure amount – is a contingent liability to government. Creditors can call on government to service or pay off the guaranteed debt on which an entity has defaulted.
Exposure amounts are projected to increase from R225.8bn in 2014/15 to R258bn as at March 31 2016. Most of the increase is accounted for by Eskom (R18.6bn), South African Airways (SAA) (R6bn), the Land Bank (R3.2bn), Sanral (R2.6bn) and Sapo (R1bn). Eskom constitutes 65% of the total exposure amount.
Government’s other contingent liabilities include the actuarial deficits of social security funds – the difference between the claims owed by these entities and their total assets. Government commitments to the Export Credit Insurance Corporation of South Africa – the net underwriting exposure of the company and its total assets – also fall into this category, as do claims against government departments, and post-retirement medical assistance to government employees.
Other contingent liabilities are expected to amount to R286.1bn in 2015/16, R33.5bn higher than in 2014/15, due to an increase in claims by exporters and increased exposure of the Road Accident Fund. Over the medium term, these contingent liabilities are projected to increase to R323.1bn.