South Africa is in trouble – and the NHI will make it worse

Ratings agency Fitch says that South Africa’s government debt/GDP will likely grow, while the introduction of the National Health Insurance (NHI) poses serious risks to public finances.

In its latest South Africa rating, Fitch affirmed its BB rating with a stable outlook for South Africa.

The group said the country remains constrained by “low real GDP growth, a high level of poverty and inequality, a high government debt/GDP ratio, and a rigid fiscal structure that hampers deficit reduction.”

That said, the ratings are supported by a favourable debt structure with long maturities and mostly local-currency-denominated debt, strong institutions, and a credible monetary policy framework.

Notably, the group forecasted consolidated government debt to rise to 76% of GDP in FY24, 77.8% in FY25 and 78.0% in FY26, which is well above the 2024 ‘BB’ median of 55%.

“This is a slower pace than we anticipated in our January 2024 review, as the government plans to withdraw ZAR150 billion (2% of estimated FY24 GDP) over FY24-FY26 from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA),” said Fitch.

“The GFECRA balance was ZAR507.3 billion in January 2024. The temporarily reduced pace of debt accumulation does not affect our assessment that debt/GDP will not durably stabilise over the medium term.”

The group also said it forecasts a consolidated fiscal deficit of 4.7% in the fiscal year ending March 2025, followed by fiscal deficits of 4.2% in FY25 and 4.0% in FY26, due to a moderation of general public service and transfer expenditures.

“Fiscal flexibility is hampered by a rigid fiscal structure, with wages and interest payments representing 49% of total expenditure in FY24 in our forecasts. We expect revenue to remain at around 27% of GDP over the next three fiscal years.”

The group also expects South Africa’s current account deficit to widen to 2.4% of GDP in 2024 (far higher than the 1.6% in 2023) before stabilising at 2.6% in 2025 and 2026.

The group believes that import growth will outpace export growth, with rising domestic demand fuelled by the relaxation of energy constraints and lower policy uncertainty.

The group also expects low real GDP growth of 0.9% in 2024, 1.5% in 2025 and 1.3% in 2026.

This is far lower than the median ‘BB’ forecasts of 3.2% in 2024, 3.6% in 2025 and 3.5% in 2026.

“Growth is hampered by a struggling logistics sector, deeply entrenched structural factors, particularly high levels of inequality, poverty and unemployment, and weak investment.”

“We expect the weakness to persist, despite robust demographics. Electricity shortages, which dragged on growth in 2022 and 2023, are expected to ease, but sporadic incidents of load-shedding could still occur.”

Although the group did say that Operation Vulindlela is progressing on reforms, it does not believe that the reforms will meaningfully raise South Africa’s low economic growth potential.

Looking more positively, the group said that the formation of the Government of National Unity (GNU) following the 2024 elections lowers short-term policy uncertainty, with the ANC and DA broadly aligned on key priorities, particularly on the growth-enhancing agenda.

“Nevertheless, risks to political stability remain, with some topics, such as foreign policy, social grants and the national health insurance, potentially contentious. Risks are exacerbated by South Africa’s exceptional level of social inequality.”

Risks to Fitch’s forecasts are balanced. Wages and the NHI Act (if implemented) pose upside risks to its expenditure forecast, while stronger GDP growth could increase revenue.

NHI fight

The NHI is huge point of contention in South Africa, with business people, members of the public, medical aid members, parties in the GNU and parliament’s legal team poking significant holes into the Bill.

President Cyril Ramaphosa previously said that the NHI would level the playing field of South Africa’s healthcare apartheid—where the private sector only helps a small percentage of the population while the public sector is overburdened and underfunded—through the creation of universal healthcare.

Although President Cyril Ramaphosa signed the Bill into law before the election, there are still significant questions about how the fund will be created.

Estimates show that funding the NHi would require increasing VAT from 14% to 21%, personal income tax by 31%, and an additional payroll tax of R1,500 per month on every working person—or a potential collaboration of all three.

Read: South Africa sitting on a R90 billion goldmine of unclaimed assets – check if you are owed money