Finance Minister warns South Africa is running out of money

Finance Minister Enoch Godongwana has warned that South Africa is at risk of running out of money unless significant spending cuts are introduced.

Godongwana sounded the alarm during a speech at the Kgalema Motlanthe Foundation’s Annual Drakensberg Inclusive Growth Forum.

He said the projected loss of revenue, which started at the beginning of the year and is expected to continue for months, pointed to a serious financial challenge.

The state had to increase its debt to compensate for the revenue shortfall, which in turn put pressure on the budget because of higher debt repayments.

“In this environment, in this trajectory, our ability to service that debt is becoming constrained, and therefore, we have got to do something about it,” he said.

“The Reserve Bank is saying sooner or later, we’re going to run out of cash. Sooner or later, we’re going to run out of cash.”

Godongwana highlighted that unless they address the challenges, South Africa will “not have cash by the end of March”.

To tackle the fiscal deficit, Godongwana prepared the country for measures to curb runaway expenditure and debt.

He said the spending cuts, set to be announced during his medium-term budget, will not be as deep as initially thought.

The reason, Godongwana explained, was because the government was bumping up borrowing to fill the gap.

National Treasury was forced to downscale its planned spending cuts because of a lack of support from President Cyril Ramaphosa and the rest of the cabinet.

“We have been forced to bump up borrowing because if we did not, the cuts would have been more massive,” he said.

South Africa’s struggling economy

Godongwana is expected to announce a large revenue shortfall and a wider-than-expected budget deficit, compounded by low growth and weaker earnings from commodity exports.

South Africa’s cumulative main budget deficit in the first five months of the 2023/24 fiscal year amounted to R238.4 billion. It was even higher – R254.4 billion – when including Eskom’s debt relief.

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.

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.

The South African Reserve Bank warned that South Africa faces a fiscal crisis as government expenditure continues to outstrip revenue.

With the widening fiscal deficit, the government is forced to issue more debt and increase 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 SARB is concerned that a large proportion of the debt is issued to cover the government’s debt-servicing costs. Therefore, it borrows money to pay its existing debt.

This scenario creates a downward spiral which puts the country at risk of hitting a fiscal cliff, threatening a severe economic decline.

Renowned economist Dawie Roodt echoed Godongwana’s concerns, saying South Africa is running out of money and facing a difficult time for the next five years.

“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.

“The minister said they want to stabilise South Africa’s debt level at 70% of GDP, but it has already increased to 72%.”

“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.”

Cyril Ramaphosa says the government has not run out of money

Despite the significant challenges, President Cyril Ramaphosa dismissed warnings from economists that South Africa is running out of money and is facing a fiscal cliff.

He said Godongwana provided the ANC NEC with the country’s fiscal situation, and they are reassured that South Africa is not running out of money.

Ramaphosa added that South Africa’s fiscal pressures stem fundamentally from an economic challenge of slow growth and joblessness.

He shied away from the spending cuts required to balance the budget, saying austerity measures would undermine their developmental agenda.

Curiously, Godongwana shared the same message regarding the state’s finances in a parliamentary question and answer session.

Godongwana said the government is working to manage public finances prudently and sustainably.

“This includes appropriately responding to the materialisation of risks, including unforeseen economic and financial conditions. To be clear, the government has not run out of money,” he said.

Although technically correct, Godongwana’s parliamentary answer may serve to downplay the serious financial dilemma South Africa finds itself in.

It may also cause confusion that he warns the country is running out of money in one forum and downplays it in another.