“Talk is cheap, money buys the whiskey” is a true and informed adage. And this does not refer to the rise in “sin taxes” on booze likely to be introduced on Wednesday afternoon when Finance Minister Enoch Godongwana unveils his budget in Parliament.
Instead, it applies to the cheap talk from various politicians.
SA “will not be bullied”, President Cyril Ramaphosa stated.
“Resist the bullies from the developed world” was the response of ANC chairperson Gwede Mantashe.
No doubt a warm glow engulfed this political trio and the cheering gallery from many in the media and civil society suggested there might be a patriotic dividend to be earned from taking on the threats and executive order of the US president.
But such talk is bargain basement rhetoric when the country you head is notching up around a peak projected debt-to-gross domestic product (GDP) of about 75%, a likely budget deficit of -5% of GDP (R258 billion) and declining tax revenues to fund this all.
While understandably irked by outside pressures and noises, state sovereignty becomes more rhetorical than real when to keep the government funded, “you are reliant on the kindness of strangers to finance the deficits”.
That vivid phrase originated from a Tennessee Williams play, but when Mark Carney (now running to be PM of Canada) was governor of the Bank of England, he adapted it to the cratered nature of the UK’s public finances.
But as other analysts have indicated, the analogy is not entirely fair as “overseas investors generally demand a rate of return rather than simply goodwill for their funding” as Duncan Weldon wrote in the Financial Times in December 2022 when brief serving prime minister Liz Truss blew up the UK economy with her disastrous mini budget.
South Africa is of course, as its politicians aver, a sovereign state. However, when the same state needs to tap the bond market to finance its deficit (to the tune of around R1 billion per day), then soverign independence is curbed by the brutal reality of the markets, the same markets it needs to access to keep the ship of state afloat.
Impact of the GNU
This week, I discussed with a market analyst, Jordan-lee Rhaman of Ginsburg Selby Private Wealth, what this means in practical terms.
As he advised: “The SA 2035 bond [which matures in a decade] has a face value of 100, and the bond carries an annual fixed coupon of 8.875%. But the market price of the bond is subject to fluctuations influenced by investor sentiment, macroeconomic conditions, and risk perceptions.”
Thus, the market determines – based on these sentiments or realities – the discount on the bond compared to its face value. The greater the perception of risk or lack of confidence in the sovereign’s economic and political fundamentals, the lower the price of the bond and the higher the yield on it.
Going back to the bond market before the GNU was inaugurated in July 2024, the yield (or borrowing cost to the National Treasury) was around 12% per annum. Thus, whatever else the GNU has or has not achieved, it has lowered by at least 1.5% (which is a huge amount on a national debt of just under R6 trillion).
Then, precisely because our bond market is so well regulated and so liquid, buying and selling SA Bonds often is a proxy for investors’ general sentiment on emerging market risk. The more US President Donald Trump blows up certainty in the wider world beyond SA, the greater likely is the retreat from emerging market bonds. And, correspondingly, the higher the costs of finding buyers for our bonds.
Of course, and hardly for the first time either, the GNU itself is bitterly divided on this year’s budget. According to media reports, Godongwana wants to increase taxes to fund the government’s spending needs, rather than pursue the harder path of economic reforms, spending curbs and cutting the bloat of the state.
In its role as a GNU partner, the DA has taken the opposite position. It issued a statement strongly opposing “any tax increases and does not support increases in personal income tax, corporate taxes and value-added tax”.
It adds a raft of pro-investment measures, business-friendly steps, and spending reductions (especially in nixing any more state-owned company bailouts, which to date have totalled more than R700 billion, almost one-third of the annual budget itself).
Nowhere for poor people to go
Kieswetter told an investment seminar on Monday: “Simply by increasing [tax] rates you don’t increase revenue collection. You simply have to understand the behaviour of people.”
He advised while “wealthy people” were capable of arranging their tax affairs to lessen the bill or simply exiting the country entirely, “poor people have nowhere to go”.
If the DA decides to vote against the budget when it is finally, only in July, presented to Parliament in the form of the appropriation bill, then all bets are off.
That bill itself is not the end of the saga, since Parliament in 2009 introduced legislation which allows the legislature itself to amend the budget. In 2009, the ANC had an unassailable parliamentary majority, so the legislation was simply seen as a sop towards theoretical accountability.
But in the changed and very modest political circumstances in which ANC Inc., is currently trading (at a hefty discount to its 2009 majority) simply enacting the budget which Godongwana presents on Wednesday afternoon is far from certain. This of course will depend on how willing he proves to be to bend to the realities of representing a party with 40% of seats in Parliament and not the 65% it achieved in 2009.
Strike against Godongwana
Markets hate uncertainty, which is one strike against Godongwana going solo on Wednesday afternoon without coalition buy-in.
Another, though, is this extremity: Voting against a budget is an extreme act of opposition to the government of the day. If the party which so votes is also in the same government, then as the movie title has it, “Something’s Got to Give”.
Yet in the improbable, but not impossible event of the DA voting against the budget and thus being forced or deciding to exit the GNU, the same bond market will react punishingly and likely far north of the pre-election expensive yields which our bonds offered to entice risk-averse buyers. Especially if the DA exit leads to an EFF or MK Party entrance into government, at worst, or at best, an ANC minority government.
Whether or not the current, and rather existential, quarrel in the GNU over the budget is patched is one issue. But even if the GNU stays the course, government borrowing – which is now costing R385.9 billion to finance via interest charges on borrowing – the bond markets, far more than political rhetoric, will have an outsize say in determining matters, unless the government decides to default on its debt.
Assuming SA doesn’t ever decide to follow that path to perdition, Godongwana and his colleagues could do well to remember this passage from historian Niall Ferguson’s 2008 book, The Ascent of Money – the financial history of the world.
He wrote: “From a politician’s point of view, the bond market is powerful because it passes daily judgment on the credibility of every government’s fiscal and monetary policies. But its real power lies in its ability to punish a government with higher borrowing costs [my emphasis].
Dictating government policy
With interest on government debt now consuming 20% of all government revenues and around 16% of all its spending, further punishment by the “amorphous markets”, as Trevor Manuel once famously called the anonymous strangers who buy and sell our debt, could be even worse.
Ferguson explains the history of bonds versus current reality: “The bond market began by facilitating government borrowing. In a crisis, however, it can end up dictating government policy.”
Talk of sovereignty is all well and good, but if Wednesday afternoon’s budget gets the thumbs down from the markets, then who knows? Or as Ferguson reminds us: “This Mr Bond [became] so much more powerful than the Mr Bond created by Ian Fleming … both kinds of bond have a license to kill.”
