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 Growth a mere 1% a yearGrowth 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 1993Deficit down to around 3% Financial account cumulative outflows = R46,1 bn Financial account cumulative inflows = R169,6bn Investment boycottRatings upgrades

5 Medium-term outlook South Africa is expected to grow at around 2.9% in % in 2005 and 4.0% in 2006

6 NOFP has been eliminated …

7 FISCAL TRENDS

8 Fiscal evolution 1990 to 2006 Projection

9 large efficiency gains in revenue have allowed expenditure to increase

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

11 Falling public debt release more funds for spending

12 Prudent debt management leads to lower debt service cost (% of GDP)

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

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…

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

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 –2000 Annual turnover was R9.8 tn –2001 Annual turnover was R11.6 tn –2002 Annual turnover was R11.7 tn –2003 Annual turnover was R10.7 tn

23 Funding instruments fully diversified….

24 STRIP PROGRAMME OF DOMESTIC BONDS

25 Domestic bond yield curve…

26 Established CPI-linked bond yield curve

27 Foreign bond yield curve…

28 Consolidated maturity profile…

29 South Africa: solid investment grade credit

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