South Africa heading for debt disaster

South Africa faces a fiscal crisis as government expenditure continues to outstrip revenue, widening its fiscal deficit, which it funds by issuing more debt and increasing its debt burden. 

This feedback loop is compounded by high interest rates, raising the cost of borrowing for the government and increasing its debt servicing costs. 

The full extent of this crisis was revealed in the South African Reserve Bank’s (SARB) Monetary Policy Review, a bi-annual report detailing the economic data it uses to inform its monetary policy decisions. 

South Africa’s fiscal deficit has widened significantly in 2023, with government spending growing faster than revenue. 

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

Its main budget deficit increased to R63.3 billion, including Eskom debt relief, in August, 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 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.

The government has had to increase its debt to finance this growing budget deficit. From the beginning of August, the Treasury has raised the issuance of government debt by R2 billion to R14.8 billion per week.

South Africa’s debt-to-GDP ratio. Source: Statista

The SARB raised its concern about the increasing cost associated with raising debt by the government. 

The government’s bond yield curve, reflecting the interest rate it has to pay investors who purchase the bonds, has steepened sharply in 2023. 

Typically, yield curves flatten or even invert near the end of a rate hike cycle as markets anticipate lower average short-term rates in the future, which is then reflected in longer-term yields.

However, the longer end of the yield curve has continued to rise in 2023. For example, the R2030 yield has risen over 100 basis points to 11.0%, while the R2044 has climbed around 170 basis points to 13.1%.

This means that the government is paying higher interest on its debt, raising the cost of servicing the debt it is issuing at a greater rate. 

So far, debt-service costs jumped by 19.3% year-on-year in the first four months of the fiscal year. 

Of great concern for the SARB is that a large proportion of the debt the government is issuing is being used to pay the debt-servicing costs on the government’s existing debt. 

About 90.0% of the funding raised through government bonds in the 2022/23 fiscal year was used to cover debt-service costs.

This proportion is expected to rise to over 100% in the current financial year and into 2025/26. 

Debt servicing costs are estimated to reach R397 billion in the 2025/26 fiscal year, almost double the R204 billion incurred in the 2019/20 fiscal year.

Government debt servicing costs are growing disproportionately to other budget items and are the fastest-growing line item.

Debt repayments are expected to equal 19.8% of all government spending at the end of 2026, making it the third largest budget item behind social grants and education.

Citadel’s chief economist, Maarten Ackerman, said earlier this year, “South Africa is in a tight corner, and if we don’t stimulate economic growth, South Africa will come close to another debt spiral.”

Economists and government officials have warned that South Africa’s rising debt is increasingly concerning without strong economic growth.

These warnings join red flags raised in 2020 by the deputy governor of the SARB, Kuben Naidoo.

Naidoo has repeatedly warned about a looming debt spiral. In 2020, he penned an opinion piece warning that “South Africa is close to an unsustainable debt spiral”.

Naidoo was previously the head of the National Treasury’s budget office and has intimate knowledge of South Africa’s debt levels, structure, and repayments.


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