South Africa’s finances slowly falling apart

South Africa is paying more to borrow than its emerging-market peers because the slow pace of reforms is dampening economic growth, according to Moody’s Ratings. 

“We think these are the issues that are weighing on the cost of debt,” said Moody’s Senior Vice President Lucie Villa.

Investors feel that while South Africa is “not on the verge of a crisis, there is this kind of slow deterioration happening and that, no matter what — even with a leadership that is trying to address this issue — it’s proving very, very challenging,” she said.

Long-term rates in South Africa exceed those in most emerging-market economies except Brazil and Mexico, Moody’s data show. 

Africa’s largest economy has grown less than 1% on average annually for more than a decade, hamstrung by disintegrating infrastructure, graft, crime, logistics and energy constraints.

A study conducted by Investec Wealth & Investment International found that the economy is at least 37% smaller than it would have been had it tracked its EM peers and sustained annual growth of 4.5% since 2010.

A coalition government formed by the African National Congress after it lost its outright majority in last year’s elections hasn’t managed to significantly accelerate reforms to speed up growth. 

The low growth has denied the country much needed tax revenues, leaving it reliant on external funding, Moody’s said. 

“You have high debt costs, and then the government wants to do something to revive its economy and private sector,” Villa said.

“But to do that, they need to invest. And to invest, they have to borrow, and they are borrowing at high rates.” She said this results in a negative feedback loop that is difficult to break. 

The country’s ratio of debt to gross domestic product has more than doubled over the past 15 years and the National Treasury expects it to peak in the current fiscal year ending March 31 at 77.4%.  

Some of the solutions Moody proposes include hastening the implementation of reforms to improve the operation and management of critical industries like electricity, water, and transport and rationalising borrowing. 

The state should also seek concessional funding from development partners to help lower foreign-currency costs where possible, the agency said. 

“Mixing normal debt with debt that is less expensive, limiting the amount of borrowing during the bridge period, and pushing in on your medium-term reform agenda” could put the country back on track, Villa said.