The South African government will have to pay back R242.5 billion in debt a year or refinance it at near-record-high interest rates, increasing already unsustainable debt-servicing costs.
Finance Minister Enoch Godongwana revealed this in the Medium-Term Budget Policy Statement (MTBPS), where he outlined the unsustainable fiscal trajectory the country is on.
Godongwana said the consolidated budget deficit has risen to 4.9% of GDP in 2023/24 compared with the estimate of 4% in the 2023 Budget.
The Treasury reported on Monday that the deficit was R14.6 billion in September from R3.3 billion a year earlier.
Total revenue in the first six months of the financial year was down 0.2% year-on-year, while gross tax revenue was up just 2.4% annually. This is far below the Treasury’s full-year growth target of 6%.
Total expenditure growth is running 9.2% higher than at the same time last year – far above the Treasury’s full-year target of 1.5%.
This resulted in the main budget deficit for the first six months of the government’s financial year growing to R253 billion – a year-on-year increase of 54%.
“In the context of persistently low economic growth, the government’s fiscal strategy remains focused on consolidating the public finances to narrow the budget deficit, stabilise public debt and ensure fiscal sustainability,” the Minister said.
“Fiscal policy will pursue a balanced approach that includes spending restraint, revenue measures and additional borrowing.”
To finance this growing deficit, Godongwana said the National Treasury will increase the rate of its borrowing.
These rising annual budget deficits have reached an extent where the government will borrow an average of R553 billion annually over the medium term.
This means that the state will borrow R1.5 billion per day to fill the gap between revenue and expenses.
As a result, gross debt will rise from R4.8 trillion in the current financial year to R5.2 trillion in the next financial year. By 2025/26, it will exceed R6 trillion.
These large debts that the government has incurred by running a consistent budget deficit will have to be repaid or refinanced as they become due.
On average, over the next eight years, R242.5 billion in debt will come due each year, which the government will either have to pay off or refinance at near-record-high interest rates.
In South Africa, this is exacerbated by the additional premium the country has to pay on its debt due to the additional risk of lending to the government.
The country’s risk premium has risen significantly over the past decade due to consistent budget deficits, policy instability, load-shedding, and a stagnant economy.
This is reflected in the rise in government bond yields, which is the interest rate the country has to pay investors to purchase its bonds and compensate for uncertainty.
To emphasise the growing risk of investing in South Africa, the gap between the yield of South Africa’s long-term debt and the yield on the United States’ 10-year Treasury bond has widened consistently since 2015.
Thus, the National Treasury said in the MTBPS that the country’s long-term debt dynamics are unfavourable.
Should weaker nominal growth and rising yields persist, it will require consistently higher primary budget surpluses – where revenue exceeds expenditure – to stabilise the government’s finances.
This will be extremely difficult for the National Treasury to achieve.