End of the road for South Africa’s government

South Africa’s government has run out of options, with its deteriorating finances and lack of capacity forcing it to turn to the private sector to fund major infrastructure projects. 

The state is effectively at the end of the road, with its significant spending over the past decade not translating into faster economic growth. 

As a result, it is now sitting with an unsustainable debt pile and is spending R1.2 billion a day to service its debt burden. 

This means that it cannot invest heavily in infrastructure projects or afford to keep some state-owned enterprises on its books. 

The government will have to find ways to encourage private sector investment in the economy and, in particular, in infrastructure projects. 

This is feedback from Stanlib chief economist Kevin Lings, who outlined the difficult situation the South African government is in. 

“With a lot of people, you will get into an ideological debate about where you stand politically and on the role of the government versus the private sector,” Lings said. 

“For me, the reality in South Africa is that the government is out of options. The government does not have the optionality that it used to have.” 

Lings pointed to the optionality the state had towards the late 2000s, when its debt-to-GDP ratio was only 26% and not the current level of 76%. 

“The state no longer has the optionality it had when Trevor Manuel was Finance Minister. That optionality was because the debt level was incredibly low, state-owned enterprises were better managed, and you had flexibility,” he explained.

“If the government wanted to expand in any sector, then it could have. If you wanted to expand, you had the balance sheet strength to do that.”

Naturally, this would result in the state playing a larger role in the local economy as it could afford to invest heavily in its capacity, public companies, and infrastructure. 

“But as time has gone on, we have wrecked these balance sheets. Government does not have the scope and flexibility for this,” Lings said. 

The state has begun to accept this in recent years through reform of the energy and logistics sector, enabling the private sector to play a larger role in the economy. 

“The ability for the government and state-owned enterprises to drive the economy is gone. It is not an option because you do not have the balance sheet,” Lings said.

This does not mean the state cannot play a meaningful role in the local economy, but rather that it cannot be expansive. 

Turning to the private sector 

As a result of the government’s inability to invest heavily in the local economy and drive growth, it has to turn to the private sector. 

South Africa’s private sector has an immensely strong balance sheet, with around R1.5 trillion sitting in cash deposits. 

This capital could be relatively easily deployed in the local economy in the right environment and with the right policy from the government. 

Crucially, it requires confidence from businesses in the state of the local economy, the direction of policy, and the stability of the regulatory regime. 

Lings said the government could try to go to the World Bank and the International Monetary Fund, but added that this should not be the state’s first option. 

“I would say that these international agencies are not your first choice. Your first choice should be to turn to the South African business community,” Lings said. 

“South African businesses have been very conservative in recent years. They have very low levels of debt, with their debt level being at the lowest level in 19 years.” 

These companies can leverage their balance sheets to benefit South Africa by moving cash off the sidelines, investing in growing their businesses, and employing more individuals. 

However, this requires confidence, which is tricky to create in South Africa given the country’s history of political and economic volatility. 

“I think we have a long history where corporates in South Africa tend not to want to put any of their cash at risk. They regard cash as a necessity, a backstop they need to have in place from a comfort and security perspective,” Lings said. 

“What we really need in South Africa is what we call expansion capex, and that tends to be a function of confidence.” 

“This type of capital is unlikely to suddenly and miraculously materialise overnight, despite trillions sitting in cash.” 

“You have to have policies in place that are going to lead to that outcome. Our view is that the best way to start that is through public-private partnerships.”