South Africa heading for debt trap

South Africa is heading for a debt trap, with the government’s debt expected to continue its rapid increase and high interest rates making it increasingly difficult to finance its budget deficit. 

Foord Asset Management investment executive Linda Eedes told Newzroom Afrika that the country cannot produce enough to repay its debt. 

Eedes said it is normal for a government to borrow money to finance a budget deficit or spend on major infrastructure projects. 

It becomes a problem when the budget deficit continues growing along with the debt burden built up to finance it. 

Just ten years ago, South Africa’s debt equalled 30% of the country’s GDP. In 2023, the government’s debt now equals 73% of GDP or R5 trillion. 

The country’s budget deficit continues to grow as the government spends significantly more than it collects through taxes. 

This year, the budget deficit is set to reach 6% of GDP, more than the National Treasury expected in its February budget. 

The government must borrow an estimated R500 billion a year – or R2 billion every working day – to finance this growing deficit and refinance maturing debt.

The only sustainable way out of this is economic growth, said Eedes. However, the country’s macroeconomic environment does not facilitate investment in the economy and thus inhibits growth. 

The South African economy is not producing enough to pay back its debt. “It is getting into a bit of a debt trap,” said Eedes. 

This is exacerbated by high interest rates, which make the government’s debt increasingly difficult to finance and repay. The government already spends 20% of all revenue on paying off its debt.

Despite the severity of the situation, Eedes does not think the situation will improve as the government is unwilling to take the actions needed to reduce its budget deficit and debt pile. 

Current macroeconomic policies do not facilitate economic growth in South Africa, and it is politically unpalatable to cut spending before an election. 

Thus, Eedes is very concerned about the financial health of South Africa and said Foord is cautious about buying too many government bonds in its investment portfolios. 

“The risk of lending to the South African government has also increased alongside the yields the government has to offer to encourage investors to buy its bonds.”

Eedes thinks this may end with South Africa in a debt crisis, which can only be solved by allowing inflation to stay high. 

Inflation erodes the value of capital and the value of debt, making it beneficial for a government to allow it to run hot to reduce the value of its debt burden.