End of an era of pain for South Africa’s government

The government’s cost to borrow money has come down after rising consistently for 15 years on the back of steps to stabilise its debt burden, a lower inflation target, and improved economic performance. 

This is important for the broader South African economy because when the government’s borrowing costs decrease, so do the costs for businesses and households. 

A reduction in the government’s borrowing costs also frees up more of the state’s budget to be used on investing in infrastructure, education, and healthcare. 

This should translate into faster economic growth, creating a positive flywheel as the billions spent on servicing the debt are no longer “dead money”. 

South African Reserve Bank Governor Lesetja Kganyago explained why the government’s cost to borrow money has declined and how it can benefit the broader economy. 

Kganyago explained that South Africa’s fundamentals appear to be improving, from economic growth to the state’s finances. 

“The year has been immensely difficult with geopolitical tension and policy shifts, but you also had a lot of positive things happening in South Africa,” Kganyago told Newzroom Afrika. 

“We came off the greylist, and the National Treasury reported that we are on course to stabilise the debt burden this year, and from the following year it will come down.” 

Regarding the government’s debt, this would be the first time since 2007/08 that the burden will not be increasing on an annual basis. 

Since 2007/08, the government has failed to run a full budget surplus, resulting in it funding its expenditure through raising debt. 

Running a budget deficit is not necessarily a bad thing. However, done consistently over nearly two decades, it results in an unsustainable debt burden, which has crossed 76% as a share of GDP. 

However, the picture has changed significantly in the past few years, with the National Treasury implementing a policy of fiscal consolidation. 

This is a painful process whereby it tries to keep expenditure increases in line with inflation and below the rate of growth of revenue collection. Essentially, taxpayers pay more and get less in return. 

This has been necessary since South Africa followed the alternative approach of funding spending with debt for too long. The government now spends 22% of tax revenues on interest payments or over R1.2 billion a day.

The process is now bearing fruit, with the government on track to post its third consecutive primary budget surplus in the current financial year. 

This means it is collecting more revenue than it is spending, resulting in it not having to raise debt to fund its obligations. Over time, this stabilises the debt load and enables the government to pay down its debt. 

Lower borrowing costs

These positive developments regarding the government’s financial health have been coupled with faster economic growth, off a low base, and a move to a lower inflation target. 

South Africa’s economy is set to grow at a rate above 1% per annum this year for the first time in over a decade. 

While still sluggish, this marks a break with the historical trend of 0.8% average annual growth for the past decade and a 1.1% rate for the past 15 years. 

Most importantly for the government’s borrowing cost is the implementation of a new inflation target, which should result in structurally lower inflation and interest rates. 

“We have a new inflation target of 3% that has been announced by the Finance Minister. Altogether, this has created an environment where the government’s borrowing costs have come down,” Kganyago said. 

“When the government’s cost of borrowing comes down and when these decline, the cost of borrowing also comes down for all the other players in the economy.” 

The National Treasury estimates that a 1% reduction in interest rates results in around R20 billion in savings for the government through a slower increase in the debt burden and reduced interest payments. 

This is significant because that money, previously spent on servicing debt, was “dead money” that created no value for South Africa. 

Now, that money can rather be invested in infrastructure, education, healthcare, and the social wage to drive faster economic growth and achieve other objectives. 

“So, we have had a difficult year, full of uncertainty, but South Africa managed to come through well, and that we saw has also been recognised by ratings agencies,” Kganyago said. 

S&P Global upgraded South Africa’s credit rating, bringing it closer to investment grade, and maintaining its positive outlook, which indicates that further improvements are around the corner. 

Reaching investment grade is critical for an economy, as many global pension funds, which sit on trillions of dollars, are not allowed to invest in sub-investment-grade assets. 

The return of some of these assets to South Africa would substantially boost economic growth, as the country is heavily reliant on external investment due to its low domestic savings rate.