South Africa in very deep trouble

Efficient Group chief economist Dawie Roodt warns that South Africa is in very deep financial trouble due to overspending and concerning debt levels.

Roodt shares his views during a discussion about the recent debacle around South Africa’s planned value-added tax (VAT) increase.

Finance Minister Enoch Godongwana withdrew his 2025 Budget due to legal action from the Democratic Alliance related to a planned 0.5 percentage point VAT increase.

Godongwana said the National Treasury will table a new 2025 Budget Review on Wednesday, 21 May 2025.

The new budget will maintain the value-added tax (VAT) rate at 15%, reversing the 0.5 percentage point increase proposed in the 12 March budget.

The biggest concern about the VAT reversal is that it will leave a R13.5 billion gap in the 2025 Budget, which must be filled.

Roodt argued that the R13.5 billion gap is not significant in the context of South Africa’s budget, which amounts to R2.6 trillion.

“The state did not run out of money or need more money. The emphasis must be that they should spend less money,” Roodt said.

Consolidated government spending is increasing at an annual average of 5.6%, from R2.4 trillion in 2024/25 to R2.83 trillion in 2027/28.

South Africa’s state spending is highly redistributive, with the social wage making up 61% of total consolidated non-interest spending over the next three years.

The rapidly increasing state spending, especially on social wages, has created budget deficits for the past sixteen years, forcing the government to fund it with debt.

South Africa’s debt-to-GDP (gross domestic product) ratio increased from 26% in 2009 to around 76% in 2025.

Adding the debt from state-owned enterprises and local authorities increases the country’s debt-to-GDP ratio to 95%. This is entirely unsustainable.

Due to the rising debt burden, South Africa will spend R424.9 billion on debt-service costs this year. This is set to increase further as debt increases.

Over the medium-term budget framework, debt servicing costs will consume 22 cents of every rand of tax collected.

South Africa heading for a financial disaster

Roodt warned that rising debt and excessive state spending mean South Africa is heading for a financial disaster, which will send the economy into a tailspin.

“One day, we will see the South African bond market collapse. The bond market keeps everybody on the straight and narrow,” he said.

He warned that when the bond market experiences turmoil, yields will rise to between 15% and 25%, sending shockwaves through the local financial market.

The rand will significantly weaken, negatively affecting the financial market. South African banks will be the hardest hit.

“Insurance prices will fall. Equity prices will fall. All South Africans will suddenly become much poorer,” Roodt explained.

The South African Reserve Bank (SARB) will be forced to increase interest rates as inflation will increase due to higher petrol prices.

“The economy will go into a tailspin. There will be much weaker economic growth, a deep recession, and all the negative effects that go with it,” he said.

“That is what we are heading towards if we do not turn South Africa’s dismal fiscal situation around.”