The tough lesson South Africa might have to learn yet again

 ·29 Apr 2024

No matter which government emerges after the 2024 election next month, even “hardcore leftists” will have to confront the reality of South Africa’s massive debt burden, says Old Mutual Wealth Investment Strategist Izak Odendaal.

In an investment note on Monday (29 April), Odendaal flagged some of the biggest concerns investors have about what will follow the national vote on 29 May.

Key issues like the power and logistics crisis, high interest rates, crumbling service delivery, and tackling organised crime are all at the forefront of what investors worry about, he said.

But for the most part, many of these issues have plans and interventions in place that are unlikely to be dismantled or disrupted by whichever government comes into power.

The energy sector is already seeing a major boost in private investment, and the logistics sector, while lagging energy, is also seeing a shift. Relief on interest rates is coming, albeit delayed, and the government and businesses are united in the fight against crime.

These processes are unlikely to be disrupted by a new administration.

One issue, though, is what happens to government debt and spending if a new government steps in—something that has historically been a major sticking point with new administrations who want to boost spending to meet campaign promises or execute new strategies.

Odendaal said that this area is primed for disruption by a new administration, which may have to learn a hard lesson—one that has been taught many times before.

“South Africa needs to stabilise government debt levels; otherwise, its interest burden will become unsustainable and crowd out other spending areas,” Odendaal said, stating that this is the “reality” that every politician needs to face.

“As it stands, 20c out of every rand collected by SARS goes towards servicing government debt. This number will continue to rise if borrowing isn’t reduced, because the market charges such a high interest rate.”

Even forcing institutions to “lend to the government” through policies like prescribed assets will not sufficiently reduce the government’s borrowing costs, he said.

“To put it differently, countries can perhaps afford reckless policies when debt levels are low, but when they are high, the market keeps you on a short leash. The only question is whether the incoming administration needs to learn this lesson afresh or if it can refer to previous experience.”

Odendaal said that there are at least two examples of this lesson being learnt in South Africa.

The first was in 1994 when the ANC came into power with the intention of using the fiscus to drive economic development and reconstruction.

“(It did so) only to discover that the cupboard was bare. By 1996, it switched to a policy of macroeconomic stability and debt reduction,” the strategist said.

The second happened in 2015 when former President Jacob Zuma fired then-finance minister Nhlanhla Nene “for (Zuma’s) nefarious reasons”.

“The resultant crash in the rand and government bonds is what ultimately forced him to reverse course. It also turned out to be the beginning of the end of his presidency,” he said.

Odendaal said that long-term interest rates (and bond yields) will probably only start trending lower relative to peer countries once there is evidence that fiscal discipline and growth-enhancing reforms are bearing fruit.

Without this evidence, no matter which administration takes over after the elections, the country’s debt problem won’t simply go away.

Read: The rand is undervalued – this is where it should be, and why it’s nowhere close

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