An increasing proportion of public debt is being sourced from foreign sources, making South Africa more vulnerable.
This is the view of economist Dr Azar Jammine, who told Newzroom Afrika that the proportion of public debt sourced from foreign sources has increased gradually over many years.
“We have been very pleased about the fact that the South African government has resisted borrowing from foreign sources anywhere near the extent of many other emerging markets,” he said.
“This has made us less vulnerable to having to pay back a huge amount in our local currency when our local currency depreciates.”
However, in recent years, he said those foreign sources of debt have become increasingly more attractive.
This is because the interest rates from these sources are far lower than the interest rates South Africa would have to pay on local currency borrowings.
The country’s domestic financial institutions and foreign financial institutions, when they borrow in rands, are demanding that the South African government pay them anywhere between 10% and 13% interest on those loans.
In contrast, foreign loans are geared towards far lower international interest rates.
For example, in dollars, the interest rates are around 4% – 9% lower than the interest rates South Africa has to pay on its rand debt.
“So, it’s become very seductive for the government to borrow increasingly from abroad,” he said.
However, this increases the country’s vulnerability should the rand depreciate a lot further.
“I don’t believe that is the case in the short term, but from a longer-term point of view, that becomes a new risk.”
In 2008/9, the country’s debt-to-GDP was around 21% to 22%. It is now around 70% of GDP.
Jammine said the government projects government debt to rise to 78% of GDP by 2025/26.
However, many private economists think this figure could be much higher at around 85% or more.
“In other words, more than quadruple proportionately what it was in 2009,” he said.
“The negative effects of this are, of course, that if you become more and more indebted, then the interest payments on that debt keep burgeoning and crowding out the government’s ability to spend on other, more essential areas of society and needs for social delivery.”
The government’s debt servicing costs have more than doubled since 2008, crowding out other expenditures and raising the prospect of a debt spiral.
The share of debt-service costs to the main budget revenue increased markedly from 14.3% in 2019 to 20.7% in 2023, well above its long-term average of 13.0%.
The government projects that its debt-service costs will settle at 22.1% of main budget revenue in 2026 and 5.4% of GDP before easing.
This has resulted in the South African government paying a greater premium on its debt to encourage investors to lend it money – further increasing its debt servicing costs.