South Africa heading for a financial disaster

Award-winning economist Dawie Roodt warns that South Africa’s current trajectory is unsustainable and that the country needs to make big changes to jumpstart economic growth.

South Africa’s real gross domestic product (GDP) per capita declined from R78,437 in 2008 to R74,411 in 2023, which means citizens became poorer over the last fifteen years.

Even more concerning is that the country ran budget deficits over the last 15 years, which significantly increased debt.

In 2008/09, South Africa’s gross loan debt amounted to R627 billion, or 26% of gross domestic product (GDP). It has ballooned to R5.21 trillion, or 73.9% of GDP.

It gets worse. Roodt explained that the government guarantees a large amount of debt from state-owned entities (SOEs), and local authorities also owe large sums.

Ultimately, the Minister of Finance may need to bail these entities out, but this debt isn’t included in the official debt-to-GDP calculation.

“If you include that debt, then we’re probably talking about a debt-to-GDP ratio in the region of about 90%,” Roodt said.

The government relies on increasing tax revenue to repay this growing debt burden and fund the state machinery.

However, South Africa has a very narrow tax base and an economy which hardly grows, placing enormous pressure on tax revenue.

South Africa’s 2024 tax statistics revealed that only 1,051 companies pay 72.3% of all company income tax in the country.

Companies with taxable income greater than R100 million constituted 0.1% of the total number but contributed 72.2% of taxable income and 72.3% of assessed tax.

The same goes for personal income tax. 978,140 South Africans, or 1.5% of the population, pay 60.9% of all personal income tax.

Even more concerning is that only 235,542 South Africans, or 0.4% of the population, pay 33% of all personal income tax.

This base is already overtaxed, and trying to increase taxes further will result in lower tax revenue rather than more.

Old Mutual Wealth investment strategist Izak Odendaal said the South African government’s interest rate on its debt is higher than the country’s economic growth.

Odendaal warned that this situation is unsustainable and means the country will eventually hit a fiscal cliff.

This means South Africa needs to change course to avoid a debt spiral and subsequent financial disaster.

Poor economic growth outlook

Speaking to Biznews, Roodt said South Africa’s economic growth this year is set to be lower than initially anticipated.

This week, the International Monetary Fund slashed South Africa’s 2025 growth expectations by 0.5 percentage points to 1.0%.

The IMF said the impact of the United States’ tariffs will be far-reaching, and no economy will escape the shockwaves set to follow.

This is much lower than Finance Minister Enoch Godongwana’s forecast of 1.9% economic growth for 2025.

Roodt has much lower growth expectations for South Africa, especially considering the local and global headwinds.

He started the year expecting GDP growth of 1.5%, which aligns with population growth in South Africa. “However, a few new headwinds appeared,” he said.

These headwinds include United States tariffs, South Africa losing its AGOA benefits, and the instability of the government of national unity (GNU).

These factors and a potential global recession will negatively impact South Africa’s economic growth in the medium term.

Roodt said that, in the best-case scenario, South Africa should expect around 1% economic growth. However, with further headwinds, it can be much lower.

“This growth is very bad, as the finance minister depends on economic growth to fund South Africa’s large state machinery,” he said.

To resolve this downward spiral, South Africa needs to improve state efficiency and implement policies to encourage economic growth.

“Unless this is done, South Africans will continue getting poorer and rich people will continue to leave due to a lack of opportunities,” he said.

South Africa’s budget deficit

South Africa’s real GDP per capita

South Africa’s Debt-to-GDP Ratio