public debt management in south africa oecd workshop phakamani hadebe deputy director-general: asset...

PUBLIC DEBT MANAGEMENT IN SOUTH AFRICA

OECD Workshop

Phakamani Hadebe

Deputy Director-General: Asset and Liability Management

25 March 2004

2

Content

1. Macro economic overview

2. Fiscal policy trends

3. Debt management

4. Challenges

5. Conclusion

3

MACROECONOMIC OVERVIEW

4

10 years of democracy

1984-1993 1994-2003

•Growth a mere 1% a year •Growth around 3% a year

•Investment shrinks 2,9% a year

•Investment expands 4.7% a year

•Inflation averages 14,3% •Inflation down to <6%

•Deficit up to 7,2% in 1993 •Deficit down to around 3%

•Financial account cumulative outflows = R46,1 bn

•Financial account cumulative inflows = R169,6bn

•Investment boycott •Ratings upgrades

5

Medium-term outlook

-4%

-2%

0%

2%

4%

6%

8%

10%

2000 2001 2002 2003 2004 2005 2006

Real GDP growth

Current account balance

CPIX

Estimate

Projection

• South Africa is expected to grow at around 2.9% in 2004 3.6% in 2005 and 4.0% in 2006

6

NOFP has been eliminated …US$ Billion

(January 1994 to December 2004) 4.8

-30

-25

-20

-15

-10

-5

0

5

10Ja

n-94

Jul-9

4

Jan-

95

Jul-9

5

Jan-

96

Jul-9

6

Jan-

97

Jul-9

7

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

7

FISCAL TRENDS

8

Fiscal evolution 1990 to 2006

-12.00%

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

1991/9

2

1992/9

3

1993/9

4

1994/9

5

1995/9

6

1996/9

7

1997/9

8

1998/9

9

1999/0

0

2000/0

1

2001/0

2

2002/0

3

2003/0

4

2004/0

5

2005/0

6

2006/0

7

Budget deficit

Primary balance

Democratic government

Projection

9

large efficiency gains in revenue have allowed

expenditure to increase

-

50

100

150

200

250

300

350

400

45019

94/9

5

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

R'b

illio

n

Total Revenue

Total Expenditure

10

Prudent fiscal policy has led to falling public debt as % of GDP …

39

49.5

0

100

200

300

400

500

600

700

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

R b

illi

on

0

10

20

30

40

50

60

Per

cen

tag

e

Foreign debt

Domestic debt

Total debt as % of GDP

11

Falling public debt release more funds for spending

21.5%

19.2%

16.8%17.6%

18.9%

21.2%20.6%

14.3%13.7% 13.3% 13.2%

21.5%

22.7%23.2%

22.4%23.3%

23.8%

15.8% 15.5%15.0%

14.7%

19.8%

18.1%

16.1%

20.4%

19.3%

10%

12%

14%

16%

18%

20%

22%

24%

26%

1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07

Debt service cost % of revenue

Debt service cost % of expenditure

12

Prudent debt management leads to lower debt service

cost (% of GDP)

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%19

94/9

5

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

13

DEBT MANAGEMENT

14

POLICY DEVELOPMENTS DEBT MANAGEMENT…

• Pre 1980 secondary market non-existent

• Debt issued on an open-ended tap basis - SARB

• Debt stand still agreement in 1985 – refinancing

problems

• First debt consolidation in 1989

• Prescribed Asset Requirement Act abolished -

1989

15

POLICY DEVELOPMENTS DEBT MANAGEMENT…

• Bond Exchange of South Africa licensed in 1996

• Pre 1998 Focus on smoothening the maturity profile

• 1997/1998 Asian financial crisis

• Development of the domestic capital markets

• Reduction of debt service costs & Risk management

• Active debt management

16

DEVELOPMENTS IN THE DOMESTIC MARKET

• CHANGE IN HIERARCHY OF DEBT MANAGEMENT OBJECTIVES

• PRE-1999:

• Primary Objective:

- Market Development considerations

• Secondary Objective:

- Maintain creditworthiness and - Promote a balanced maturity structure

17

DEBT MANAGEMENT OBJECTIVES

Post 1999

Primary Objective

– Minimising cost of debt subject to acceptable risk levels

Secondary Objectives

– Ensure government access to financial markets

– Diversification of funding instruments

18

Public sector borrowing requirement…

5.06%4.80%

4.31%

3.37%

2.07%

1.32%

1.93%

1.24%1.12%

3.10%

3.47% 3.35%

2.82%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1994/95

1995/96

1996/97

1997/98

1998/99

1999/00

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

Per

cent

age

of G

DP

0

10

20

30

40

50

60

R'B

illio

n

Borrowing requirement (actual amount)Borrowing requirement as a % of GDP

19

Total government loan debt portfolio

20

Government debt is the backbone of a highly sophisticated domestic debt

capital market

• Total debt US$ 63,7 billion projected in 2003/04, with turnover of over US$ 2 trillion

• Active debt management programme incorporating:– Debt consolidation (switches)– Buy-backs– Inflation-linked bonds– Strips

Net domestic long term borrowings

18.2

3.0

6.4

-11.1

-6.9

18.9

27.3

23.7

32.6

-15

-10

-5

0

5

10

15

20

25

30

35

1998 1999 2000 2001 2002 2003 2004 2005 2006

R'B

illio

n

Projection

21

ACTIVE DEBT MANAGEMENT RATIONALE

• Enhance liquidity across yield curve

• Restructure maturity profile

• Reduce fragmentation on the yield curve

• Manage inflation expectations

22

DOMESTIC CAPITAL MARKET REMAINS ROBUST….

– 1997 Annual turnover was R3.4 tn





23

Funding instruments fully diversified….

Instrument % ContributionTreasury Bills 8.3%Variable rate bond 2.1%Fixed income bonds 77.6%CPI Linked bonds 8.4%TOTAL 100.0%

24

STRIP PROGRAMME OF DOMESTIC

BONDS

BondStripped amount

Reconstituted amount

Total (As at 2004/03/16)

R'Million R'Million R'MillionR 150 48 24 24 R 153 1,000 - 1,000 R 157 5,541 3,261 2,280 R 186 300 - 300 R 194 3,000 - 3,000

Total 9,889 3,285 6,604

25

Domestic bond yield curve…

8.99.3 9.4 9.6 9.5

8.8

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

2005 2008 2010 2014 2015 2025

R 150 R 194 R 153 R 201 R 157 R 186

Maturity and bond code

17-Mar-04

26

Established CPI-linked bond yield curve

R 1.5

R 8.8

R 1.6

R 14.4

3.97%

3.85%

3.94%

3.96%

3.78%

3.80%

3.82%

3.84%

3.86%

3.88%

3.90%

3.92%

3.94%

3.96%

3.98%

2008 2013 2023 2033

R 198 R 189 R 197 R 202

Yiel

d

R 0

R 2

R 4

R 6

R 8

R 10

R 12

R 14

R 16

Nom

inal

am

ount

(R'B

illio

n)

Nominal amount issued

CPI-linked bond yield curve

27

Foreign bond yield curve…USA

2.8%

4.0%

4.8%

5.8%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2006 2009 2012 2017

Maturity

Europe

2.4%

3.0%

3.9%

5.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2004 2006 2008 2013

Maturity

28

Consolidated maturity profile…

0

20

40

60

80

100

120R

bill

ion

State Owned Entities foreign debt

State Owned Entities domestic debt

Government foreign debt

Government domestic debt

29

South Africa: solid investment grade credit

1994 2004 1994 2004Fitch BBB A- BB BBBMoody's Ba1 A2 Baa3 Baa2Standard and Poors BBB+ A/A-1 BB BBB

Local currency rating Foreign currency rating

30

CHALLENGES

31

CHALANGES…..• Dematerialisation of money market instruments

• Strive for same day settlement (T+0)

• Shorten the book close period

• Continue the splitting of 3-legged instruments

• Increased spending on social development,

infrastructure and health

32

CONCLUSION

33

Conclusion• South Africa’s credit story is strong

and improving

• There is a stable political and social structure

• Solid economic policy framework

• Low public debt

• GDP growth is set to gain momentum

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