Trillions in debt – and nothing to show for it

 ·3 Nov 2023

South Africa’s debt is expected to jump to R6 trillion by 2026, with finance minister Enoch Godongwana announcing this week that the country will again turn to lending to plug the gaping holes in the budget.

While the minister’s medium-term budget on Wednesday (1 November) was received as well as it could have, given the current circumstances in the country, economists, analysts and investors have flagged debt as a significant issue.

The government’s debt-to-GDP ratio and fiscal deficit projections have deteriorated significantly since the February Budget Speech.

Over the medium-term, gross debt is projected to now peak at 77.7% of GDP in 2025/26, versus February’s Budget estimate of 73.6% of GDP for the same year.

Worryingly, gross debt is projected to still remain above 70.0% of GDP in 2031/32, and the expanding debt ratio has reduced the sustainability of government finances, with a debt ratio of 60% of GDP instead seen as the maximum sustainable debt ratio for an emerging market economy.

The escalation of government debt is particularly egregious when considering that, in 2009, debt was sitting at only 23% of GDP in 2009. Interest payments

While a high debt-to-GDP ratio is not uncommon in emerging markets – countries usually have something to show for it.

According to Stanlib chief economist Kevin Lings, the government has saddled the country with an enormous debt bill, where the interest alone is costing taxpayers R1 billion a day – at the cost of education, health and infrastructure.

The economist noted that the MTBPS showed an ongoing deterioration of the country’s finances, but this was at least tempered by the fact that the Treasury is showing a primary budget surplus (minus interest costs).

“If it weren’t for the debt level, then perhaps the government’s finances aren’t so bad,” he said.

The reality is that the debt can’t just be ignored, however.

Budget projections show that for every R1 the government spends, 22 cents goes off to paying debts. This has risen from 7 cents in 2009.

While this cost has tripled over the last 15 years, the country has very little to actually show for it.

“If we walk around the country a bit, we’ve taken up debt enormously, but what do we have to show for it, other than stadiums? You’re going to struggle to find something to demonstrate (value for money),” Lings said.

“If you look at China; go back to the same time period, government debt was 28% of GDP (in 2009) and now it’s at 80% – slightly higher (than South Africa).

“But if you walk around China, you can see what they spent the money on. The development over that time period is just phenomenal. They put themselves in a position to sustain decent growth for many years – those assets are going to last for decades. They will reap the reward for undertaking the investment.

“We find ourselves in the position where the debt is incredibly high, but we don’t have the investment. We still have to undertake the investment in the energy sector, transport, logistics and water. That’s the problem, we didn’t use the increase in debt well.”

Economists and analysts warned for years about South Africa’s credit rating dropping below investment grade, but many politicians shrugged it off or tried to downplay its importance.

However, Lings said that the consequences of that complacency are now evident: the lower the credit rating, the more expensive it is to borrow – resulting in a mounting debt bill.

“Our level of debt at 77% is unaffordable. South Africa is at a point where we simply cannot afford it. South Africa is paying R1 billion a day to service the interest – and that money is gone, it’s not going to schools, hospitals and infrastructure. You’ve lost that, and it’s a massive opportunity cost,” he said.

Read: South Africa is at huge risk

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