The South African government fears it is running out of money and may actually impose spending cuts to avoid that possibility, but it will take much more to walk the country back from the fiscal cliff edge.
This is feedback from the managing director at South African consulting company Krutham Peter Attard Montalto.
Montalto wrote on Krutham’s website that the Medium-Term Budget Policy Statement (MTBPS) last week “was a remarkably conservative document” from a supposedly socialist government.
“Even before you consider the risks in implementing it, it was surprising that it could be put forward in the first place.”
Montalto said that the only reasonable explanation for this is that the government fears it is running out of money and is finally listening to expert advice.
“The Cabinet, it seems, is rightly scared of running out of cash, of the threat of SOEs landing uncontrollably back on the state, of the risks to creditworthiness and loss of credibility.”
Finance Minister Enoch Godongwana previously said South Africa was running out of money during a speech at the Kgalema Motlanthe Foundation’s Annual Drakensberg Inclusive Growth Forum.
He warned that South Africa is at risk of running out of money unless significant spending cuts are introduced.
Godongwana 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”.
The South African Reserve Bank has also 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.