Government borrowing increases

Wednesday, February 22, 2017

Cape Town - Government’s gross borrowing requirement is expected to reach R243.3 billion in 2016/17, National Treasury said on Wednesday.

“In 2016/17, the budget deficit amounts to an estimated R170.5 billion. Debt repayments amount to R72.9 billion, bringing the total borrowing requirement to R243.4 billion,” said Treasury in its 2017 Budget Review.

Government borrows money to finance the difference between revenue and expenditure, and to pay debt that is due.

The R243.4 billion borrowing requirement is R13.9 billion higher than projected in the 2016 Budget.

During the first half of the year, borrowing remained within projected levels. In September 2016, government increased Treasury bill issuance in anticipation of a higher budget deficit and to cover short-term cash flow pressures expected in December 2016 and January 2017.

In the Budget Review released as Finance Minister Pravin Gordhan tabled the 2017 Budget on Wednesday in Parliament, government said it cannot always balance its budget through tax increases and spending cuts.

In 2017/18, the gross borrowing requirement will be R220.9 billion, as government also expects to borrow R21.2 billion to increase its cash reserves to meet future commitments.

National Treasury says the gross borrowing requirement is projected to increase from R220.9 billion in 2017/18 to R284.4 billion in 2019/20. The main budget deficit constitutes the bulk of this requirement.

Debt redemptions of R54 billion are expected in 2017/18, increasing to R104 billion in 2019/20, mainly as a result of large foreign loan redemptions, said the Budget Review.

Most of this requirement will be met by domestic long-term bond issuance, which will increase gradually to R197 billion in the outer year of the three-year period. The value of short term issuance will remain broadly stable over the three-year period.

Guarantees to State-owned entities

Government noted that guarantees to State-owned companies remain as a major risk to the fiscus.

Among the changes in government’s guarantee profile in 2016 was an additional going-concern guarantee of R4.7 billion, increasing its total guarantees to R19.1 billion to the national carrier, South African Airways (SAA).

In October 2016, government granted the Land Bank an additional R4.5 billion guarantee to lengthen the maturity profile of its debt. This will bring its total guarantees to just over R11 billion.

Meanwhile, the R7 billion guarantee to the Reserve Bank for the bailout of African Bank expired in February 2016 without being called on. It has been replaced with a R3 billion guarantee.

“As a result of these changes, guarantees to public institutions are expected to increase by R7.8 billion, from R469.9 billion in 2015/16 to R477.7 billion in 2016/17,” said the review.

Over the same period, exposure (the amount that the State-owned companies have borrowed against their guarantee) is expected to rise by R52.5 billion.

 The main changes to guarantees were:

  •  Eskom is expected to use R43.6 billion of its guarantee in 2016/17 and R22 billion annually over the medium term.
  • SAA has used R3.5 billion of a R4.7 billion going-concern guarantee, with the remainder likely to be used in 2017/18.
  • The South African National Roads Agency Limited used R2.9 billion of its guarantee in 2016/17, increasing exposure to R30.1 billion. The full guarantee is expected to be used by 2018/19.
  • The South African Post Office increased its exposure by R2.6 billion in 2016/17, utilising nearly all of its R4.4 billion guarantee.

Guarantees to IPPs

In 2016, in line with global standards, government began to categorise power purchase agreements between Eskom and Independent Power Producers (IPPs) as contingent liabilities.

The liabilities can materialise in two ways. If Eskom runs short of cash and is unable to buy power as stipulated in the power purchase agreement, government will have to loan the utility money to honour its obligations.

If government terminates power purchase agreements because it is unable to fund Eskom or there is a change in legislation or policy, government would also be liable.

“Both outcomes are unlikely. Government has committed to procure up to R200 billion in renewable energy from IPPs. As at March 2017, exposure to IPPs – which represents the value of signed projects – is expected to amount to R125.8 billion,” said the review.

However, exposure is expected to decline to R104.1 billion in 2019/20. -

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