Coronavirus: 7 ways governments could deal with their debt burdens | Fin24
Governments across the world are taking on debt burdens in an effort to deal with the impact of the Covid-19 crisis, and it’s the right thing to do, according to an analyst.
Moody's, which was the last rating agency to have SA's debt ranked at investment grade, recently downgraded it to junk status. S&P also dealt the country another blow when it downgraded its debt further into junk status. These ratings actions saw SA fall out of the world government bond index. ahead of the crisis, but S&P sees further borrowings to fund Covid-19 to push this towards 90% of GDP.
In SA we have seen the Reserve Bank purchase government bonds in order to stabilise dysfunction in the market. Although not the bank's intent, it had the effect of easing bond yields, that along with a low inflation outlook, made the asset class quite attractive to investors. Inflation can be used to erode the value of debt. But practically, this is difficult to achieve, said Silberston.
The SA economy was already in a recession ahead of a nationwide lockdown instituted to slow the spread of Covid-19. The country is slowly reopening sectors of the economy, but Treasury projects a contraction of 16.1% based on a protracted lockdown and an even longer recovery in economic activity.Government could also increase its income by raising taxes."Widespread tax rises seem unlikely for now," said Silberston.
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