South Africa will need to borrow R500 billion over the next year, or R2 billion per weekday on average, to fund its current fiscal deficit and refinance maturing debt. This increases the risk of investing in the country and increases borrowing costs for local companies.
Nedbank CEO Mike Brown flagged this concerning trend after the company released its half-year results earlier this week.
The bank reported earnings growth of 11%. Rising impairments from its retail segment subdued this growth, as Nedbank had to increase provisions for bad debts by 57%.
Nedbank is the first of the ‘big four’ banks to report half-year results, with its results seen as a sign of things to come for its competitors.
South Africa’s major banks are expected to report higher levels of impairments as consumers and businesses come under pressure from higher interest rates and a stagnant economy.
Brown said most of South Africa’s economic troubles are internal “own goals”, such as load-shedding, logistical inefficiencies, and the country’s foreign policy affecting relations with the country’s largest trading partners.
Nedbank anticipates meagre growth for South Africa this year of only 0.3%, rising to 1% in 2024. The bank estimates that load-shedding alone costs the economy R900 to R1 billion a day.
Low to no economic growth will likely result in increased unemployment and add to the cost of the government’s social support schemes.
This will put tremendous pressure on the country’s finances and potentially widen the existing fiscal deficit.
To finance the current fiscal deficit and refinance maturing debt, the government will have to borrow R500 billion a year or R2 billion every working day.
Brown said this increases the risk premium attached to investing in South African assets as the debt burden is unsustainable, raising questions over whether the government can meet its obligations.
Apart from a growing debt burden, the risk premium has been driven up by load-shedding, logistics constraints, crime and corruption, and questions over the country’s foreign policy.
The rising risk premium has resulted in the demand for government bonds from foreign investors falling, with net outflows from the bond market for the year-to-date reaching R116 billion.
“When you’ve got more sellers than buyers, the price goes up, and when the price of bonds goes up, the cost of capital goes up. That is negative for investment because investments have to meet a higher hurdle rate. That is a huge concern,” Brown said.