South Africa is facing a fiscal crisis, with the government’s finances deteriorating while its debt burden and debt-servicing costs continue to grow.
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.
FirstRand CEO Alan Pullinger said he expects the government to continue to issue more debt to finance its growing fiscal deficit.
“The commodity boom is now over, and the rest of the economy has not been able to fill the gap. How do you fill the gap? I think the government has to issue more debt,” Pullinger told Business Times.
“This is not good because, as you know, when we take on debt, we have to service it — there are interest costs that come with the debt, and it has to be repaid at some point.”
The government will have to borrow R500 billion over the next year to finance the growing fiscal deficit, or R2 billion per weekday on average.
From the beginning of August, the National Treasury has increased the issuance of government debt by R2 billion to over R14 billion per week.
Echoing concerns from Pullinger, Nedbank CEO Mike Brown flagged his concern with the government’s rising debt and the interest payments needed to service it.
Brown said this increases the risk premium attached to investing in South African assets as the debt burden is unsustainable, raising questions over whether the government can meet its obligations.
Apart from a growing debt burden, the risk premium has been driven up by load-shedding, logistics constraints, crime and corruption, and questions over the country’s foreign policy.
The rising risk premium has resulted in the demand for government bonds from foreign investors falling.
“When you’ve got more sellers than buyers, the price goes up, and when the price of bonds goes up, the cost of capital goes up,” Brown explained.
“That is negative for investment because investments have to meet a higher hurdle rate. That is a huge concern.”
South Africa running out of money
Pullinger warned that pressure on the government to cut spending will increase as the country may begin to run out of money.
“Governments around the world are starting to run out of money. That applies to a number of countries, not just here. Things are becoming tight. Minister of Finance Enoch Godongwana has been outspoken on this point. I think they have a very difficult balancing act,” Pullinger said.
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 unpopular.