Ramaphosa surprises with comments about government spending

South Africa is running out of money with its largest budget deficit since 2004, but President Cyril Ramaphosa does not think spending cuts are the obvious solution.

Data released by the National Treasury on Wednesday showed that the budget moved to a deficit of R143.8 billion for July.

It is the largest deficit since 2004 and wider than the R115.5 billion forecast by economists. There was a surplus of R36.7 billion in June.

The situation has reached such concerning levels that South African Reserve Bank (SARB) Governor Lesetja Kganyago said it was essential that the country reduced fiscal risks.

In June, the central bank expressed concern about a growing reluctance from local investors to continue absorbing government issuance.

Demand at Tuesday’s government bond auction was the lowest in nearly two years, based on data compiled by Bloomberg. Bidding was weakest for the longest-dated 2048 notes.

South Africa’s current debt-to-gross domestic product (GDP) ratio is 73%. In nominal terms, the country owes nearly R5 trillion.

The situation is set to become much worse as the country’s fiscal deficit this year will be around 6% of GDP.

The state continues to spend far more than it gets in, which means it has a growing fiscal deficit and needs to borrow money to make ends meet.

Despite the government’s growing expenses, Ramaphosa said lower spending is “not necessarily” the answer to the country’s fiscal challenges.

“The revenue projections that we had have been lower than what we had anticipated. That immediately tells you that we are going to have headwinds,” Ramaphosa said.

“What should we do? The discussion is ongoing. It is not necessarily cutting spending, it is seeing how best you focus on your key delivery areas,” he said.

“After considering key investment areas, you look at how you recalibrate the other spending, you re-prioritize,” he added.

Ramaphosa’s comments alight with election promises

Renowned economist Dawie Roodt previously warned that South Africa is running out of money, but the spending cuts were not palatable in an election year.

“The state’s expenses are going to be much larger than expected, and economic growth much smaller,” he said.

Roodt said South Africa’s fiscal deficit would be much larger this year than what Finance Minister Enoch Godongwana budgeted for.

“The minister said they want to stabilise South Africa’s debt level at 70% of GDP, but it has already increased to 72%,” he said.

“South Africa’s fiscal deficit for 2023 is set to be between 6% and 6.5% of gross domestic product (GDP), much higher than the minister’s expected 4%,” Roodt said.

“I expect South Africa’s debt to increase to 75% of GDP by the end of the year and reach 80% of GDP by the end of 2024.”

The only way to reduce the country’s debt is to increase income through economic growth or cut spending.

The economy is under pressure because of the government’s business-unfriendly policies, which leaves spending cuts as the only option.

However, announcing cuts to public sector employees, salary freezes, or reducing social grants will be very unpopular.

It can be fatal ahead of an election year when the ruling ANC is fighting to maintain its majority in Parliament.

Therefore, Ramaphosa’s comments on spending make sense in terms of party politics, but not as the country’s leader.

Without spending cuts or rapid economic growth, South Africa’s debt will continue to grow, and it will continue to spend more on servicing interest on this debt.

It can lead to a debt spiral, ultimately resulting in high inflation levels, further stifling economic growth.

The outcome of this situation can be devastating for a country, which is why many experts are urging the country to cut spending as a matter of urgency.

Reporting with Bloomberg