Governments’ red ink, Dynasty Wealth Management

Governments around the world racked up a record $92 trillion in public debt by the end of 2022, with 3.3 billion people living in countries where interest payments are greater than their expenditure on health or education. To put it simply, many governments around the world would be declared insolvent if they were publicly traded companies.

But notably, governments answer to the electorate rather than to banks and shareholders, which gives them the freedom to rack up levels of debt that would be unsustainable for private enterprise. Because they have their hands on powerful levers like monetary policy – sometimes even by printing money; taxation; and (usually as a last resort) cutting spending, governments can delay their reckoning with their creditors almost indefinitely.

This week, global equity markets remained under pressure on the back of yet another debt ceiling crisis in the US, orchestrated by a handful of populist Republican politicians. This follows a debt ceiling standoff in May, where an agreement was reached to fund the government until September 30. The clock is thus running out for the Republican-led Congress to come to an agreement that will avoid a federal government shutdown.

US Treasury bond yields are up on the back of the impasse, and equities are set to suffer their worst month of the year. We are hopeful that the stalemate will be resolved, in which case stock markets might see another relief rally. If the government does shut down, we would be in uncharted territory, and the consequences for the world economy will be dire.

The crisis also highlights how US sovereign debt has soared in the wake of the global financial crisis and the pandemic. The annual costs of borrowing to government has risen to 4.6%, the highest since 2007. The debt to GDP ratio is 98%, up $1.5 trillion to $33 trillion since the debt ceiling was lifted in early June. This comprises $26 trillion in debt held by the public and $7 trillion of debt in Treasury securities.

In South Africa, the picture is even uglier. The Treasury has proposed deep cuts in government spending due to a lower-than-expected tax take and spiraling government debt. National debt has climbed to above R4.9 trillion and government faces eyewatering amounts of interest payments, together with constraining space to spend on infrastructure and social services.

Unlike in the US, the South African government is less able to print money to help pay off debts without suffering dire consequences. That is why a measure of austerity should rationally be expected on government spending. But that may crimp GDP growth and tax revenue in the short term, as well as potentially trigger social unrest. The ANC government is also reluctant to cut spending on social grants or diesel for Eskom ahead of elections in 2024, raising the spectre of a debt trap.

Sovereign debt is the “red ink” that governments in many countries, not just the US or SA, will need to address in the next decade. But even when the risks are in the US, the dollar remains the world’s safe haven currency. With general elections in several key economies scheduled for next year, expect governments to run up their credit bills to avoid making trade-offs that cost them votes.

“As an individual who undertakes to live by borrowing, soon finds his original means devoured by interest, and next no one left to borrow from -so must it be with a government.”

– Abraham Lincoln 16th US President

“Government is like a baby. An alimentary canal with a big appetite at one end and no sense of responsibility at the other.”

– Ronald Reagan 40th US President

Global News

A deal over the weekend to avoid a US government shutdown is at risk — with House Speaker Kevin McCarthy making big demands of President Joe Biden and bringing little leverage to the clash. White House staff received guidance on Thursday about how they will be affected by the likely government shutdown, which is a further indication that a deal may not be reached by the Sunday deadline.
A shutdown would inflict immediate pain on millions of Americans while triggering a cascading economic crisis. Private companies that rely on federal contract work are bracing for up to $1.9 billion a day in lost and delayed revenue.
Michael Power, who recently retired from Ninety One where he was the Global Strategist for most of the past two decades, has worked out that, last year, the US generated more than 60% of the world’s current account deficits and more than 40% of the world’s budget deficits. It only has 4.2% of the globe’s population. He also found that, on a net basis, today’s savers outside of the US devote about 60% of their globally mobile savings towards funding the US current-account deficit and, through doing that, fund 50% of the US budget deficit.
Hedge fund investors have ramped up their bets against stocks as a desire for equities slows after a 20% rally this year that’s fuelled by euphoria over artificial intelligence. Fast money investors increased their bearish wagers to drive down their net leverage by 4.2 percentage points to 50.1%, according to Goldman Sachs Group’s prime brokerage. This is the biggest week-on-week decline in portfolio leverage since the lows of the pandemic bear market.
Although US stocks jumped back after nearing oversold territory this week thanks to tech giants and car makers as tension between striking workers and the companies eased, September is still shaping up to be the worst month in 2023 for the US stock benchmarks after the Fed left interest rates at the highest in 22 years at its last meeting.
China’s property crisis, and the falling yuan, have boosted demand for gold in the region, which hit a recent record against world prices. On Wednesday, an ounce of gold in Shanghai cost $2,007, about 6% higher than the price in London or New York, according to calculations by Bloomberg.
The ongoing challenges faced by Chinese property giants, including Evergrande Group, pose a significant threat to President Xi Jinping’s efforts to resolve the country’s housing crisis, reflecting how fragile the property market is, and its impact on the economy.
Evergrande founder, Hui Ka Yan, has been placed under police control, while the company has suspended trading in its shares. Yan is thought to have committed crimes, escalating the legal peril for a tycoon whose indebted real estate conglomerate has saddled investors, homeowners, and suppliers with billions in losses.
In the latest AI development, OpenAI’s ChatGPT can officially hear and respond to a user, audibly. This is the latest tweak of tech advancement, which OpenAI says will be available to paying customers within the next two weeks, and more broadly to non-paying users “soon after”. Microsoft, through the firm’s investment in OpenAI, hopes to reclaim the title of the world’s most valuable company by selling the technology that will transform many desk jobs.
E-commerce giant Amazon is set to invest as much as $4 billion in AI safety and research company Anthropic, a crucial partner in its effort to become a major player in generative artificial intelligence and offering a vote of confidence in the hot startup. As part of the deal, Anthropic will move most of its software to Amazon Web Services data centres.
McKinsey & Company is set to pay $230 million as it continues to settle lawsuits for its role advising opioid manufacturers in their sales of the painkillers. More than 3,000 state and local governments have sued opioid makers, distributors and sellers seeking compensation for billions of tax dollars spent battling the public-health crisis spawned by the painkillers. Total recoveries across the US are expected to exceed $50 billion once all payments are made.
As at Thursday’s close the S&P was down 0.54% for the week.

Local News

It is no exaggeration to say that the South African Reserve Bank governor, Lesetja Kganyago, is the one man standing between South Africa and hyperinflation, a worthless currency and eventual bankruptcy. This is according to Natale Labia, who writes on the economy and finance and says that Kganyago is wise enough not to print money to fund the deficit. Should the independence and conservatism of the Reserve Bank ever be threatened, the days of R19 to the US dollar and 12% on 10-year bond yields could seem very distant memories indeed.
Business for South Africa believes its joint effort with the government to solve the country’s national challenges has been productive so far and could well result in an end to power outages and far more productive freight management systems by the end of 2024. This was the outcome of a high-level meeting with President Cyril Ramaphosa earlier in the week. It seems there are interventions that could shift sentiment and put the country on a better path, such as tabling the Electricity Regulation Amendment Bill, ensuring that National Treasury holds the line in the upcoming MTBPS, that the Investigating Directorate is appropriately empowered, and that the National Prosecuting Authority Amendment Bill is tabled and approved.
The National Planning Commission has scolded government for not backing a blueprint to address the country’s socioeconomic crises after it was adopted by Parliament in August 2012, casting doubt on its targets being achieved. The country is set to miss all but one target: the labour force participation rate. Economic growth was stagnant, and poverty was exacerbated during the decade under review.
Fears of a recession are fading, according to the South African Reserve Bank’s six-month indicator measuring economic performance. The indicator surprised at the start of the third quarter, showing economic activity grew 0.1% month-on-month in July after an upwardly revised 0.2% uptick the previous month.
However, South Africa’s rand has dropped to a three-month low against the dollar and yields on benchmark government bonds hit record highs as traders are concerned about the fiscal outlook as well as the risk-off mood globally. The local currency hit R19.20 against the dollar earlier this week.
According to Statistics South Africa, in new data on the economic performance of the nine provinces for the first time in two years, Gauteng remains the country’s powerhouse, with 2.8% growth last year compared with the national rate of 1.9%. At the same time, Gauteng, the Western Cape, and KwaZulu-Natal are the dominant provinces in terms of economic output, having contributed 33%, 16% and 14%, respectively, to national GDP in 2022.
Diplomatic relations between the US and South Africa remain sound, despite recent tensions over Russia’s invasion of Ukraine. This is according to Reuben Brigety, the US ambassador to Pretoria, who previously caused a scandal when he accused South Africa of supplying arms to Russia.
The glacial speed at which Public Enterprises minister Pravin Gordhan moved to block the Eskom board’s proposed preferred CEO – four months – suggests a clear tension between him and Eskom’s board. The minister, apparently, was unhappy to be presented with one choice and not the four in the short list and has said the board should consider those over 60 years of age. As John Dludlu, CEO of the Small Business Institute, puts it: “With the house clearly on fire, the government apparently sees no urgency in appointing a full-time CEO for the embattled Eskom.”
In Johannesburg, Rand Water is implementing water shedding. Rand Water blamed the water cuts on thunderstorms that caused power surges at water treatment plants, although a commentator in the Daily Maverick article argues that 44.8% of water supplied to the city is lost due to burst pipes, leaks, and illegal connections.
More consumers are resorting to gambling in a desperate attempt to get more cash in as they battle bad debt. This is according to Capitec, the only bank to have reported on this movement, which said that gambling transactions increased 35% year-on-year. In August, Sun International said first-time depositors increased 469% and deposits jumped 216% in the six months to June at its sports betting business SunBet.
With reference to corporate “red ink”, Tongaat Hulett shareholders could get nothing for their shares. A business plan due to be implemented on Sunday will see business assets sold out of the legal entities, and it’s expected that the remaining legal entities will be wound down and ultimately liquidated.
Discovery Bank is set to enter the full-service banking sector by offering a new home loan product for clients next year through SA Home Loans. Taking on the big banks, Discovery could offer up to a 1.5% discount on the interest rate based on a client’s status on Vitality Money.
Naspers, which has developed its own generative AI platform, is actively encouraging its companies and employees to use it. The platform is also being used to improve its operations and to add to some of its products.
As at the time of writing, the rand was 1.2% weaker and the ALSI was 2.2% lower for the week.