South Africa is heading for a fiscal disaster as the government’s rising debt burden is reaching unsustainable levels, and poor economic policy is resulting in stagnant economic growth.
Economists have been sounding the alarm over South Africa’s increasing debt burden for years. They are particularly concerned about the debt-servicing costs threatening to drag the country into a debt spiral.
South Africa’s debt servicing costs have increased to roughly R1 billion a day, which Sean Segar of Nedgroup Investments calculates at $1 per day per South African citizen.
This line of expenditure has increased disproportionately to other expenditures, and the addition of the R254 billion Eskom bailout will increase debt servicing costs to 19.8% of total government spending in the next three years.
Citadel chief economist Maarten Ackerman said the rising debt-servicing costs increase the possibility of a debt spiral.
“[South Africa] is in a tight corner, and if we don’t stimulate growth, South Africa will come close to another debt spiral… this time with higher interest rates.”
Ackerman also raised concerns about the government’s projections for GDP growth over the short term as this underpins the calculation of South Africa’s budget deficit and debt-to-GDP ratio.
According to Ackerman, the government is overly optimistic, with Treasury’s estimated growth for 2023 being higher than that of all rating agencies and the Reserve Bank.
The lack of growth means South Africa’s debt-to-GDP ratio and the budget deficit will likely increase over the short term.
Efficient Group chief economist Dawie Roodt joined the chorus, saying, “We are heading for a disaster in South Africa in terms of the fiscal accounts.”
He warned that the government’s debt burden is already unsustainable, and it continues to spend more than it collects in tax revenue.
Rising government debt will result in higher levels of inflation and even weaker economic growth, Roodt said.
Economic growth would result in a better debt-to-GDP ratio and increase the revenue collected by the government, reducing its budget deficit and enabling it to pay off more of its debt.
However, Roodt said the current economic policies of the South African government will not lead to economic growth.
“We have a destructive government in South Africa, the result of which is weak economic growth.”
“There is some serious trouble heading our way,” warned Roodt. The only sustainable solution is to grow the economy or for the government to significantly cut spending and raise taxes.