South Africa could save R20 billion a year if it reduced its debt servicing costs by just 1%. This was revealed by Stanlib chief economist Kevin Lings, who spoke at Morningstar’s Investment Conference 2023.
Lings said South Africa currently spends around 20% of tax revenue on interest payments to service its debt.
This is set to increase as the country cannot pay off the principal amount on its debt, only the interest owed on the principal.
South Africa’s debt servicing costs have skyrocketed over the last 15 years, from 7% of tax revenue in 2008 to 20% this year.
This has led to fears of a debt spiral, with the IMF’s second-in-command warning that the country may see its debt servicing costs grow exponentially.
The IMF projects that the interest bill on the government’s debt could skyrocket to triple the size of its health budget within five years.
This would result in interest payments on debt consuming 27% of the country’s entire budget, up from 19%.
South Africa’s current debt-to-gross domestic product (GDP) ratio is 73%. In nominal terms, the country owes around R5 trillion.
The situation is set to become much worse as the country’s fiscal deficit this year will be around 6% of GDP.
Fiscal deficit is the term used to describe a shortfall in the government’s income compared to its spending.
In South Africa, the state is spending far more than it gets in, which means it has a growing fiscal deficit and needs to borrow money to make ends meet.
The National Treasury revealed that South Africa recorded its largest budget deficit since at least 2004, sending the rand crashing and lowering demand for government bonds.
Data released by the National Treasury on Wednesday showed that the budget moved to a deficit of R143.8 billion for July.
This 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 IMF called on the government to do more to stabilise the country’s debt by cutting expenditures. However, this is politically unpalatable and unlikely to happen.