Stanlib chief economist Kevin Lings said South Africa is on a fiscal cliff, and drastic action is required to prevent the country from falling into a financial crisis.
Lings’ comments come in light of concerns that South Africa’s fiscal deficit is widening as government spending is outpacing revenue.
The government’s main budget deficit ballooned to R14.6 billion in September, over triple what it was a year earlier. This resulted in a R253 billion deficit for the first six months of the financial year.
Despite this significant deficit, Lings told BizNews that South Africa is not yet at a point of default where it requires substantial support from the IMF to keep afloat.
This is partly because the country’s foreign debt is still very low, which is the “key factor that helps us”.
“When countries get into trouble, what really catches them out is they’ve got a lot of foreign debt,” he explained.
“When you get into trouble, your currency weakens, and your foreign debt becomes much more expensive, and you just can’t afford it.”
He explained that South Africa is not that vulnerable, and the path the country is on is not an outright fiscal crisis or a fiscal collapse.
However, he warned that this is the direction the country is headed towards.
South Africa was on the path to financial collapse during state capture but managed to pull itself back, partly because mining companies had generated significant tax revenue.
However, South Africa is now moving back in that dangerous direction, Lings warned.
“The flags are going up, the warnings are going up, and the message is very clear that if you carry on like this, if you don’t manage the SOEs, if you don’t bail out and get them restructured, if you don’t grow the economy, then you’re heading in a very ugly direction that will result in a fiscal crisis,” he said.
South Africa has a history of waiting for crises to happen and only addressing problems when that point is already reached.
He compared it to the current electricity and logistics crises, pointing out that many people warned it would happen, but their warnings were not heeded.
“We tend to wait until we get to that point of crisis, that point of collapse. And then everybody’s attention is focused on it,” he said.
However, Lings warned that this cannot be done with a country’s fiscal parameters because it is far more difficult to salvage.
“Under those situations, you need a substantial restructuring of your economy and your fiscal position, and you would probably need outside assistance like an IMF support program,” he said.