South Africa heading for a serious financial crisis

Renowned economist Dawie Roodt warned that South Africa is heading for a serious financial crisis, causing the rand to collapse and inflation to rise.

Speaking to State of the Nation, Roodt explained that South Africa’s current debt-to-gross domestic product (GDP) ratio is 73%. It excludes the debt from state-owned enterprises.

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

This means that South Africa’s debt-to-GDP ratio for the current financial year, which is set to end in March 2024, will increase to over 75%. The next year, it will increase to 80%.

“The increased debt burden is becoming a major problem because the debt has to be serviced,” Roodt said.

He said the United States and Europe have been selling South African debt and that local banks and asset managers started buying it.

However, it comes at a premium as these institutions demand higher returns for the increased risk. This means the state has larger interest payments.

It has reached such concerning levels that Reserve Bank Governor Lesetja Kganyago has warned that it is starting to put banks’ balance sheets at risk.

Roodt said South Africa is in a toxic situation where it has a huge fiscal deficit, forcing the state to borrow a lot of money.

The foreigners are selling the debt, and local banks are buying the debt. At the same time, long-term interest rates are increasing, and the rand is weakening because of it.

“We are getting into a situation where the debt levels are rising to such a level that we are heading for a serious financial crisis,” he said.

Finance Minister Enoch Godongwana is very concerned about the financial situation and has consulted with the government about the issue.

The National Treasury proposed drastic steps to rein in spending as the government has run out of money and faces a debt trap.

The measures include a freeze on new public service jobs, stopping procurement contracts for all infrastructure projects, and keeping public servant salary increases in check.

However, there was significant resistance to the spending cuts from the left-leaning and socialist Tripartite Alliance.

Trade unions have called for strikes over the proposed budget cuts by the National Treasury, and the government seems to follow their lead.

Media reports suggest that there has been strong resistance from the whole cabinet regarding the proposed spending cuts.

The ANC government does not want to tamper with the Public Sector Wage Bill as it may lose support ahead of the 2024 general election.

There is also little appetite for an increase in value-added tax to fund the social relief of distress grant, which the ANC wants to make permanent.

“I am afraid we are heading towards serious financial problems in South Africa,” Roodt said.

These financial problems will have big implications for the rand, inflation, long bond prices, and economic growth.

He said the rand will likely weaken significantly over the next two years and can reach R25 to R30 to the US dollar.

“Long bonds, which currently trade at around 12%, can reach 15%. Inflation can also rise to between 10% and 15%,” he said.

“Because of the fiscal accounts, we are heading for very high levels of inflation, a much weaker currency, and much weaker economic growth,” he said.