Fiscal Policy, Public Debt Management and Government Bond Markets: Issues for Central Banks

Abstract

To reinforce the long-term sustainability of public finances, the South African National Treasury has proposed a set of fiscal guidelines informed by three principles, namely: a counter-cyclical fiscal stance, long-term debt sustainability and inter-generational equity. Owing to the sound management of the fiscus during the six years of strong economic growth (2002–2007), budget surpluses and fiscal space were created.

The South African economy entered the 2008–2009 recession with healthy public finances and comparatively low levels of debt. The issuance of domestic government bonds and Treasury bills alongside government cash balances remains the government’s primary source of financing. This reflects the healthy, liquid and deep domestic bond market in South Africa. Domestic government debt accounted for 90.1 per cent of total gross debt of the national government in 2010/11. The government’s total gross loan debt (comprising domestic and foreign debt) increased from R990.6 billion in the 2010/11 fiscal year to an estimated R1.2 trillion in 2011/12. As a ratio of gross domestic product, the national government’s total gross loan debt increased from 36.0 per cent to an estimated 40.1 per cent during this period and is expected to plateau at just over 42 per cent in 2014/15, which should allay concerns over debt sustainability.

The financing of fiscal deficits recently had no adverse impact on monetary policy, despite the shift from international to domestic markets for public debt. The build-up of government deposits with the central bank reflects the government’s funding of foreign exchange purchases for purposes of foreign reserve accumulation. The growth in the central bank’s balance sheet over the past six years reflects the accumulation of foreign reserves and was not due to any sort of quantitative easing policies pursued by the central bank. The central bank issues its own debt paper. The central bank is a full participant on the National Treasury’s debt management committee.

Full publication: Fiscal Policy, Public Debt and Monetary Policy in Emerging Market Economies

Keywords: Sustainability of public finances, government debt-to-GDP ratio, government debt maturity profile, liquid, deep and transparent government debt markets, debt management coordination, yield curve for government debt, capital flows into domestic debt markets, public debt and monetary policy

JEL Classification: E52, E62, H63