London - The one word that they would not mention in the January 8, 2023, statement of the ANC National Executive Committee marking the 111th anniversary of the founding of the ANC, Africa’s oldest continuous political movement, was “revenue”.
The document is predictably a statement of intent of the priorities for the governing party in the year ahead, laced heavily with the archetypal rhetoric of aspirations and a “what-to-do” list in danger of defying the gravity of even the most sophisticated policy decision making.
One can perhaps excuse the exuberance and the revolutionary zeal of ANC cadres, but the real economy’s pre-eminent custodian, Finance Minister Enoch Godongwana, all too well knows that government programmes and pledges must be costed and paid for before they can be doled out.
But as the last few months have shown, even the most modest quarterly improvements in GDP, unemployment, tax revenues and the stable rating outlook affirmation for the South African economy by the three top rating agencies, have the cadres and their political masters swooning in misplaced euphoria and accompanied by a litany of unrealistic spending demands and promises.
Overall, consolidated government spending is projected by the National Treasury to increase from R2.21 trillion in 2022/23 to R2.48 trillion in 2025/26 at an average growth rate of 4%.
This is against estimated gross tax revenues for 2022/23 of R1.68 trillion, leaving a fiscal deficit of R53 billion.
The problem is that treasuries have a habit of being over-optimistic about revenue and spending projections, especially in a highly politicised polity such as South Africa.
The Treasury forecasts the 2022/23 fiscal deficit at 4.9% of GDP compared with 5.1% by Fitch Ratings, declining to 3.9% in FY24/25.
“We expect the consolidated fiscal deficit,” explains Jan Friederich, Head of EMEA Sovereign Ratings, at Fitch Ratings, “to be 5.1% of GDP in the following two years with the difference due to Fitch forecasting weaker government revenue and higher payroll spending.
South Africa’s revenue relative to GDP is actually quite high compared with emerging markets more generally (at 28% of GDP, compared with 21% for Sub-Saharan Africa), reflecting a relatively high level of formality in the economy and this is an important support for creditworthiness.”
However, Friederich warns that socio-economic pressures for new spending programmes pose risks for debt, which is already quite high.
“We consider it important that the National Treasury seems quite committed to avoiding new programmes that are not fully financed by new permanent revenues or cuts in other areas.
Unlike the government, we expect debt to continue rising from 72% in 2022 (including about 1.3% of GDP local government debt not covered by the national treasury data) to 81% in 2026/27,” he added.
True, South Africa benefits from a benign debt structure (very long maturities and largely in local currency) that limits refinancing risks and strong economic policy institutions, although questions have been raised over the future “independence” of the Reserve Bank after calls from ANC radicals for expanding its mandate.
Against this Fitch sees revenue collection relative to GDP as transitory, falling back as profits in the mining sector normalise, assuming lower commodity prices and as economic growth slows, especially because of continued load shedding.
If South Africa has a benign debt structure, is its public debt management programme too parochial, predictable and passé – a mix of Treasury papers, the odd bonds in the international market and multilateral loans?
Perhaps Godongwana can take a leaf out of his Nigerian counterpart, finance minister Zainab Shamsuna Ahmed’s public debt playbook.
Sukuk issuance is now a firm component of the financing mix, which is exclusively tied to road infrastructure funding with in-built financial, economic and social inclusion metrics.
Nigeria’s Debt Management Office (DMO) issued its fifth Ijarah (Leasing) Sukuk in December 2022 raising N130bn (R4.91bn) in the process.
The investor universe is diverse, but Abuja has increasingly allocated a greater portion to retail investors, consolidating their confidence in Sukuk as a competitive real economy funding instrument benefitting both the country and investor, and in the process building that yield curve for such debt papers and paving the way for corporate Sukuk offerings.
The DMO initially intended to issue a N100bn Sukuk, but it was 165% over-subscribed which saw the transaction upsized to N130bn, of which Stanbic IBTC Capital, a member of Standard Bank Group, was a lead manager. The 10-year Sukuk was priced at a rental rate of 15.64% per annum.
This brings the total Sovereign Sukuk issuance to N742.557bn (R28.03bn) since the inaugural one in 2017, making it the most prolific sovereign Sukuk issuer in Africa.
According to Patience Oniha, Director-General of the DMO, “we consider Sukuk to be one of the useful and accepted products for raising funds.
The proceeds from the issuance will be used solely for the construction and rehabilitation of 44 arterial roads across the six geopolitical zones of the country.”
In contrast, South Africa lost its first mover advantage when in 2014 it became the first African sovereign to issue a benchmark $500 million in the international market.
Since then, the National Treasury’s Sukuk issuance policy has been lost in the fog of inertia, prevarication, large senior personnel turnover, and a mismatch between DMO pronouncements and any sign of an issuance.
Even the prospect of a rand-denominated sovereign Sukuk has dissipated, which has left potential local and international investors baffled and frustrated.
Private wealth in Africa is estimated at about US$2 trillion, according to Barclays Africa.
Of this $1 trillion is concentrated in four countries – South Africa, Nigeria, Egypt and Kenya.
The absence of Sukuk in the National Treasury’s public debt mix is an opportunity cost lost in raising competitive public financing embedded with financial and social inclusion and tapping and empowering a wider new investor class interested in socially responsible and ESG infrastructure investments.
Parker is an economist and writer based in London.
Cape Times