South Africa facing fiscal crisis

South Africa’s budget deficit widened further in August and September compared to a year ago as government expenditure continues to grow faster than revenue. 

The main budget deficit was R47.3 billion. It increased to R63.3 billion including Eskom debt relief in August 2023. This is up from a deficit of R42.7 billion in August 2022.

The provisional financing data from the National Treasury for September 2023 also points to a widening budget deficit. The main budget deficit is expected to be R12.8 billion, compared to R3.3 billion in September 2022.

The Treasury said total revenue growth was 8.7% year-on-year in August, while total expenditure grew at a stronger pace of 9.2%.

The cumulative main budget deficit in the first five months of the 2023/24 fiscal year amounts to R238.4 billion, or R254.4 billion, including Eskom debt relief. 

This is much higher than the deficit of R160.7 billion in the same period in 2022/23.

To finance this growing budget deficit, the government has had to increase the amount of debt it issues.

From the beginning of August, the National Treasury has increased the issuance of government debt by R2 billion to over R14 billion per week. 

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 said to 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.” 

It is estimated that the government will have to borrow R500 billion over the next year to finance the growing fiscal deficit and refinance maturing debt, or R2 billion per weekday on average. 

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. That is negative for investment because investments have to meet a higher hurdle rate. That is a huge concern,” Brown said.