One thing of critical importance the ANC did not break in South Africa

The ANC managed to avoid borrowing significant amounts of money in foreign currency despite its mismanagement of South Africa’s economy and state finances. 

This is a common trap for developing economies hungry for capital, which results in many of them suffering debt crises due to foreign exchange fluctuations. 

As their currencies weaken due to collapsing commodity prices or other shocks, their ability to pay back debt in foreign currency is lost, resulting in a financial crisis. 

South Africa has avoided this despite the government borrowing heavily over the past 15 years due to its sophisticated and liquid domestic capital markets. 

This enabled the state to borrow from local financial institutions and raise capital from investors on the JSE’s bond markets. 

As such, the vast majority of its debt is rand-denominated. This makes it easy to pay back and avoid a cash crunch by issuing more money, if needed. 

Efficient Group chief economist Dawie Roodt explained that this is a luxury very few African countries have, with many forced to borrow in dollars or euros. 

“The Reserve Bank has over $65 billion in foreign exchange reserves. That is more than sufficient to pay off our debt in foreign currencies,” Roodt told State of the Nation. 

“That is a typical problem of emerging economies, particularly in Africa. If you go out and borrow dollars to import goods, you run out of dollars very quickly.”

When the time comes for these countries to repay their dollar-denominated debt, they often do not have any dollars left as they generate insufficient export earnings. 

“That has not happened in South Africa. We have some foreign debt and are slowly increasing it, but it is a tiny proportion of the overall amount,” Roodt said. 

“The reserves at the Reserve Bank are more than sufficient for that. That is something the ANC did not break. We are a long way off from that.” 

Roodt explained that the main reason why the government did not have to borrow abroad is that South Africa’s financial markets are well-developed. 

“We have very sophisticated and liquid capital markets in South Africa. It is very easy to borrow money in rands,” Roodt said. 

“That is what the ANC has been doing. They have been borrowing huge amounts of money in rands, with South Africa having trillions of rands worth of debt.” 

South Africa’s real debt burden

This does not mean that South Africa is in a good position with regard to its finances, with it still having dangerously high levels of debt. 

The government has significantly increased its borrowing since 2008, as it has increased spending without a corresponding rise in economic growth. 

Much of its increased spending went towards salaries and employee compensation, rather than investment into infrastructure and other productive parts of the budget. 

This resulted in the government running consecutive budget deficits every year since 2008/09, taking debt as a share of GDP from 26% to over 76%. 

Now, the South African government spends 22% of all tax revenue collected on servicing its debt. This crowds out spending in other areas, such as education, healthcare, and policing. 

Roodt explained that the real debt burden of the country is even higher, as these figures do not include liabilities at state-owned enterprises (SOEs) and municipalities. 

“You have to remember that the SOEs owe a lot of money to investors. Eskom alone has R350 billion in outstanding debt, and Transnet has R150 billion,” Roodt said. 

“You can include the deficit at the Road Accident Fund as debt owed by the state. At least you can add another R1 trillion to the government’s debt.” 

This would bring South Africa’s debt burden to R7 trillion and, as a share of GDP, that is close to 90% of South Africa’s annual economic output. 

“The real debt that the Finance Minister is responsible for is 90% of GDP. That is very, very high for any economy, particularly one that is not growing,” he said. 

Roodt explained that more developed economies, such as the United States and China, borrow significantly more money than South Africa. 

These countries have debt burdens that exceed their annual GDP. However, their economies are growing relatively quickly, and they have significant credibility with investors. 

In the case of the United States, it issues the world’s reserve currency, giving it the ability to borrow significantly more as it can effectively print more money to devalue the debt and investors will still buy it.