ONE of the privileges of being the finance minister is having the power to borrow money on your and my behalf.
Most of us do not realise that our present and previous finance ministers have accumulated debt to the value of about R40000 on behalf of every individual in the country, which will have to be paid back at some time in the future.
But how much is the total outstanding debt of the state and how is it calculated?
As a rule, the state spends more than it collects by way of (mostly) taxes. The difference between spending and revenue is referred to as the fiscal deficit.
The minister and the Reserve Bank differ slightly on the way they report state finances and I will attempt to follow the Bank’s definitions as far as possible.
The Bank mostly reports on “national government” finances, while the minister usually reports on the “consolidated” figures.
Nevertheless, the actual “cash flow” deficit, which roughly follows an accrual approach to state finances, is the amount borrowed every year in order to balance the books. This additional borrowing is then simply added to the existing outstanding debt to determine the new outstanding debt of the state.
Note that whenever a debt instrument matures, it is usually “rolled” over — a new debt instrument is issued in its place and the deficit is not affected. Put differently, the cash-flow deficit is added to the existing debt pile every year and unless the state runs a surplus, debt will just keep going up.
At the end of December last year, total outstanding gross state debt amounted to R1,8-trillion, which is equal to about 47% of gross domestic product (GDP).
This debt consists mostly of bonds but other instruments such as treasury bills and foreign loans are also included.
This debt is referred to as “total gross loan debt” and is the figure usually used by the Bank when it refers to state debt.
The minister, however, prefers to subtract the state’s cash balances from the gross figure to get “net loan debt” — which was about 41% of GDP in December.
The state’s cash balances consist mainly of balances at commercial banks, which are immediately available for expenditure, and cash balances at the Bank.
The balance at commercial banks usually averages about R40-billion, while the balance at the Bank is about R170-billion.
The history of the balances at the Bank is quite interesting.
During 2006-07, when the state ran fiscal surpluses, the state’s balances at commercial banks rose strongly with the better than expected revenues.
This was a problem for then finance minister Trevor Manuel because other ministers were eyeing this excess cash.
At the same time, huge amounts of foreign inflows saw the Bank increasing its foreign reserves.
However, whenever the Bank “buys” foreign currency, it “sells” rand, which increases the stock of money in the economy. Under “normal” circumstances, the Bank would have issued instruments to “drain” this excess liquidity.
The increased balances of the state allowed the Bank and the finance minister the opportunity to address both their problems.
Huge amounts of cash were transferred from commercial banks to the Bank, draining liquidity and getting rid of embarrassing and tempting large cash balances.
The “reason” for this transfer of balances was that the Treasury was transferring balances to the Bank “to buy reserves”, which was just an excuse, of course.
In a way, the “balances” at the Bank are not really available anymore because it has already been “spent”, yet the minister keeps on deducting it to calculate the “net loan debt”. That means that net loan debt is actually closer to 46% of GDP.
But that’s not all. The Treasury also “owes” the Bank about R180-billion for losses on the “gold and foreign exchange contingency reserve account”. These losses originated from numerous transactions in which the Bank acted on behalf of the Treasury — most notably losses on forward cover transactions.
These losses are not usually included in “state debt” by either the Bank or the finance minister.
Still, we have not accounted for all “state debt”.
In total, the state guarantees about R461-billion of the debt of state-owned enterprises, of which R225-billion has been used.
These are explicit guarantees, while we all know that the state will eventually also stand in for the non-guaranteed debt of state-owned enterprises.
One can argue that the debt of the local authorities should be included in state debt as the state regularly bails out bankrupt local authorities — this is about 2% of GDP.
Clearly, “state debt” is a question of definition.
Following the Bank’s definition of “debt”, state debt fell from a high of 49% in 1995 to a low of 26% in 2009, a period of 14 years.
Within five years, debt nearly doubled to about 47% of GDP last year.
Should revenue again underperform or should GDP growth again disappoint, the debt-to-GDP ratio will be likely to exceed Finance Minister Nhlanhla Nene’s expectations and could exceed previous highs during the next financial year.
Somehow, Nene sounded quite relaxed about this yesterday!
The chances are that we shall see debt levels exceeding 50% of GDP this year and a further ratings downgrade is then a real possibility — and then you will owe even more than you think.
Dawie Roodt is chief economist at the Efficient Group
Ultimately individuals must carry the can for state debt
Most of us do not realise that our present and previous finance ministers have accumulated debt to the value of about R40000 on behalf of every individual in the country, which will have to be paid back at some time in the future.
But how much is the total outstanding debt of the state and how is it calculated?
As a rule, the state spends more than it collects by way of (mostly) taxes. The difference between spending and revenue is referred to as the fiscal deficit.
The minister and the Reserve Bank differ slightly on the way they report state finances and I will attempt to follow the Bank’s definitions as far as possible.
The Bank mostly reports on “national government” finances, while the minister usually reports on the “consolidated” figures.
Nevertheless, the actual “cash flow” deficit, which roughly follows an accrual approach to state finances, is the amount borrowed every year in order to balance the books. This additional borrowing is then simply added to the existing outstanding debt to determine the new outstanding debt of the state.
Note that whenever a debt instrument matures, it is usually “rolled” over — a new debt instrument is issued in its place and the deficit is not affected. Put differently, the cash-flow deficit is added to the existing debt pile every year and unless the state runs a surplus, debt will just keep going up.
At the end of December last year, total outstanding gross state debt amounted to R1,8-trillion, which is equal to about 47% of gross domestic product (GDP).
This debt consists mostly of bonds but other instruments such as treasury bills and foreign loans are also included.
This debt is referred to as “total gross loan debt” and is the figure usually used by the Bank when it refers to state debt.
The minister, however, prefers to subtract the state’s cash balances from the gross figure to get “net loan debt” — which was about 41% of GDP in December.
The state’s cash balances consist mainly of balances at commercial banks, which are immediately available for expenditure, and cash balances at the Bank.
The balance at commercial banks usually averages about R40-billion, while the balance at the Bank is about R170-billion.
The history of the balances at the Bank is quite interesting.
During 2006-07, when the state ran fiscal surpluses, the state’s balances at commercial banks rose strongly with the better than expected revenues.
This was a problem for then finance minister Trevor Manuel because other ministers were eyeing this excess cash.
At the same time, huge amounts of foreign inflows saw the Bank increasing its foreign reserves.
However, whenever the Bank “buys” foreign currency, it “sells” rand, which increases the stock of money in the economy. Under “normal” circumstances, the Bank would have issued instruments to “drain” this excess liquidity.
The increased balances of the state allowed the Bank and the finance minister the opportunity to address both their problems.
Huge amounts of cash were transferred from commercial banks to the Bank, draining liquidity and getting rid of embarrassing and tempting large cash balances.
The “reason” for this transfer of balances was that the Treasury was transferring balances to the Bank “to buy reserves”, which was just an excuse, of course.
In a way, the “balances” at the Bank are not really available anymore because it has already been “spent”, yet the minister keeps on deducting it to calculate the “net loan debt”. That means that net loan debt is actually closer to 46% of GDP.
But that’s not all. The Treasury also “owes” the Bank about R180-billion for losses on the “gold and foreign exchange contingency reserve account”. These losses originated from numerous transactions in which the Bank acted on behalf of the Treasury — most notably losses on forward cover transactions.
These losses are not usually included in “state debt” by either the Bank or the finance minister.
Still, we have not accounted for all “state debt”.
In total, the state guarantees about R461-billion of the debt of state-owned enterprises, of which R225-billion has been used.
These are explicit guarantees, while we all know that the state will eventually also stand in for the non-guaranteed debt of state-owned enterprises.
One can argue that the debt of the local authorities should be included in state debt as the state regularly bails out bankrupt local authorities — this is about 2% of GDP.
Clearly, “state debt” is a question of definition.
Following the Bank’s definition of “debt”, state debt fell from a high of 49% in 1995 to a low of 26% in 2009, a period of 14 years.
Within five years, debt nearly doubled to about 47% of GDP last year.
Should revenue again underperform or should GDP growth again disappoint, the debt-to-GDP ratio will be likely to exceed Finance Minister Nhlanhla Nene’s expectations and could exceed previous highs during the next financial year.
Somehow, Nene sounded quite relaxed about this yesterday!
The chances are that we shall see debt levels exceeding 50% of GDP this year and a further ratings downgrade is then a real possibility — and then you will owe even more than you think.
Dawie Roodt is chief economist at the Efficient Group
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