Bloomberg News

South Africa Keeps Borrowing Unchanged Even as Budget Gap Widens

November 01, 2011

Oct. 25 (Bloomberg) -- South Africa’s government will keep domestic borrowing unchanged this year, drawing on cash reserves and switching to longer-maturity debt to finance its widening budget gap.

The National Treasury left its estimate for the amount of funding from the domestic capital market at 150.4 billion rand ($19.1 billion) for the year through March, according to the Medium-Term Budget Policy Statement published today.

Slower growth in Africa’s biggest economy is putting pressure on revenues, forcing Finance Minister Pravin Gordhan to increase his estimate for the budget deficit this year to 5.5 percent of gross domestic product from 4.6 percent last year. South Africa will keep borrowing under control by using cash it initially set aside to bolster the central bank’s foreign- currency reserves, said Johan Redelinghuys, the Treasury’s chief director of financial operations.

“We’ve put money aside to buy foreign currency, so now we’re going to use that money to meet some of our domestic funding requirements,” Redelinghuys said in an interview in Cape Town today before the medium-term budget was released. “Why borrow when you can use cash?”

Government bonds due to mature in coming years will also be switched into longer-term debt to avoid refinancing, reducing borrowing costs, he said.

The Treasury plans to sell 151.3 billion rand of domestic bonds in the year through March 2013 and 149.6 billion rand in the year after that. Bond sales are expected to drop to 140.8 billion rand in 2014/15 as the government narrows the budget deficit. A further 22 billion rand will be raised in Treasury bills in each of the next two years, according to today’s report.

Rising Debt Costs

South Africa is aiming to keep borrowing in check as the cost of servicing its debt climbs. Interest on debt will increase 14 percent a year over the next three years to 9.2 percent of spending in the year through March 2015, from 7.9 percent this fiscal year, according to the Treasury.

“Higher borrowing must be carefully managed; capital markets are volatile, and debt service costs are already the fastest-growing category of expenditure,” Gordhan said in a speech prepared for delivery to lawmakers.

The Treasury plans to sell about $1 billion a year on international capital markets over the next three fiscal years, according to the mid-term budget. It won’t sell an international bond this year after selling $750 million of securities in 2010/11. The remainder of the budgeted $2 billion of foreign funding will be met from the Treasury’s foreign-exchange holdings, Redelinghuys said.

Public Sector Borrowing

“Borrowing in the international capital markets will continue to finance government’s foreign-currency commitments,” the Treasury said.

The public-sector borrowing requirement, which includes state-owned companies such as Eskom SOC Holdings Ltd., is estimated to reach 241.5 billion rand, or 8.1 percent of GDP in the year through March 2012, lower than the 276.4 billion rand projected in February, the Treasury said. Borrowing will rise to 258.4 billion next year, before easing to 248.7 billion in 2013/14 and 206 billion rand the following year.

Government net debt will probably increase to 1.6 trillion rand, or 40 percent of GDP, by 2014/15, from 1 trillion rand, or 33.8 percent of GDP, this year, the Treasury said.

The government’s borrowing requirement will be 166.6 billion rand in this fiscal year, higher than the February estimate of 157.9 billion rand. It will climb to 181.2 billion rand in the next fiscal year before easing to 175.6 billion rand the following year and 150.4 billion in 2014-15.

--Editors: Nasreen Seria, Gordon Bell.

To contact the reporter on this story: Robert Brand in Cape Town at rbrand9@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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