A Senior Portfolio Manager at Momentum Investments unpacks the history of South Africa’s debt burden and why we can only take this goal at face value.
In Finance Minister Enoch Godongwana’s inaugural budget speech, one of the more notable outcomes was the Minister’s intent to stabilise the government’s debt to GDP ratio. Gross loan debt is now expected to peak at 75.1% of GDP in 2024/25 which is a favourable outcome compared to the 88.9% that was previously forecasted.
According to Senior Portfolio Manager at Momentum Investments, Zisanda Gila, South Africa has been on an unsustainable fiscal trajectory since the global financial crisis in 2008/09. “The global financial crisis effectively re-shaped the country’s fiscal framework because the budget went from a surplus to a deficit in a short period.”
She says this was further worsened by the Covid-19 pandemic which resulted in lockdown measures halting the activity of an already ailing South African economy. This led to another sharp deterioration in the economic and revenue outlook.
“Many South Africans lost their jobs during this time, and this had an impact on the country’s tax revenue collection. In response to this, the government needed to increase its gross borrowing requirements as the expenditure increased and redirect funds to fight the Covid-19 virus.”
Gila says government needs to implement active economic reforms and fiscal consolidation as it remains committed to stabilising its debt-to-GDP from spiralling out of control in the long term.
This year, tax collections exceeded expectations due to a strong mining sector revenue and improved earnings from commodities price rally. In his budget, Minister Enoch Godongwana mentioned that the government is aiming to use a portion of this mining tax windfall to reduce the fiscal deficit and stabilise the country’s debt. Gila says this received a positive response from the bond market as the R97.5 billion reduction in the borrowing requirement between 2022/23 and 2024/25, will certainly help narrow this fiscal deficit.
“Cash balances are also expected to be drawn down over the same period to partly fund the borrowing requirement. This will also lessen the impact of the higher interest rates that government pays to investors on its outstanding debt and improve the overall long-term debt outlook,” says Gila.
However, she emphasizes that government’s debt burden is high and so are the debt-servicing costs, especially when considering how steep the yield curve is. “These interest payments, which average at 20 cents for every rand of revenue collection, have crowded out some spending on essential public services such as health and basic education. This is expected to remain high despite the envisaged rollover in the debt ratio, unfortunately.”
For the average South African and their business interests, Gila says a commitment to stabilise the debt-to-GDP ratio by 2024/25 is going to demand intensive spending cuts and perhaps moderate tax increases for the government to achieve this goal.
“Based on global economic movements that have always managed to surprise us in the past, there is a high chance we won’t be able to stabilise our debt burden. This will impact our markets and come at a large economic and social cost if we’re not careful.”
In closing, Gila believes that stabilising South Africa’s debt can be attainable however the government needs to take note of the ongoing global pandemic and recent ongoing conflict taking place in Europe. It will require government to be realistic and factor in global economic activities which can be out of their control.
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