How R1 per USD changes South Africa’s debt

Finance Minister Enoch Godongwana revealed that an increase in inflation, interest rates, and the rand exchange rate significantly influences South Africa’s debt.

This was part of Godongwana’s answer to a parliamentary question on how he manages the risks associated with the debt portfolio, which is heavily measured in US dollars.

He was also asked what measures are in place to mitigate potential adverse effects on the national debt obligations.

Godongwana explained that the impact of rising interest rates in the US on debt service costs is twofold.

• Firstly, rising US rates directly affect the sovereign’s dollar-denominated debt, which constitutes about 10% of the total debt portfolio.

• Secondly, US rates serve as a base rate for domestic borrowing costs, meaning that, all else being equal, higher US rates translate to higher domestic debt service costs.

Debt levels, new borrowing, and macroeconomic variables such as interest rates, inflation, and exchange rates determine debt service costs.

A sensitivity analysis of debt and debt service costs to changes in macroeconomic variables illustrates the impact of these factors.

Godongwana used the example of a 1 percentage point increase in inflation and interest rates, along with a R1 depreciation of the rand against the dollar.

This will result in a R50.7 billion increase in South Africa’s gross loan debt and a R7.9 billion increase in debt service costs.

To mitigate these risks, the National Treasury has set a strategic benchmark for external debt at 10% to 15% of the total debt portfolio.

Godongwana added that the current level of foreign currency-denominated debt is below 10%.

The share of short-term debt, such as treasury bills and floating-rate notes, increased marginally in response to the higher US interest rate environment.

“It should be noted that the Federal Reserve is expected to begin cutting interest rates later this month, bringing an end to the rising interest rate cycle seen previously,” Godongwana said.

The minister said the government continues to finance its gross borrowing requirement in a prudent and sustainable manner within its strategic risk benchmarks.

He said the financing strategy enables the government to employ a range of instruments to meet its borrowing needs.

This is done while reducing risks associated with refinancing and currency fluctuations and containing aggregate borrowing costs.