Award-winning economist Dawie Roodt warns that South Africa is heading for serious financial problems with rising debt and low economic growth.
Speaking to Business Day TV, Roodt highlighted that foreign investors are selling South African debt, with local banks buying it.
S&P Global Ratings revealed that government debt constituted 15% of South African banks’ assets in 2023, a significant increase from the previous 10%.
The South African Reserve Bank’s biannual health check in November 2023 warned that systemic risk to the country’s financial stability has remained elevated.
“As government debt has increased, so has the domestic financial sector’s exposure to it,” the SARB said in its report.
The main reason, as Roodt highlighted, was that there had been a big decline in foreign investors buying South African government bonds.
This trend accelerated after South Africa was excluded from the World Government Bond Index in April 2020.
The result is that South African banks have picked up part of the difference, increasing their exposure to government bonds.
Roodt said the higher exposure is not a problem yet. However, if the trend continues, it can reach concerning levels.
Another challenge is that the private sector will demand much higher returns on the increasing risk of funding growing state debt.
State debt has already reached record levels, with debt servicing costs now exceeding R1 billion per day.
Unless there is significant economic growth or the state drastically cuts spending, the country is heading for financial trouble.
Roodt highlighted that South Africa’s state debt is not confined to the central government under Finance Minister Enoch Godongwana.
The collapse of municipalities and state-owned enterprises, including Eskom and Transnet, adds to the government debt burden through bailouts.
It adds a tremendous amount to state debt if it is incorporated. “Interest is not the only problem. It is also the rate at which this debt increases,” he said.
Roodt said although many developing economies, like the United States, have a higher debt-to-GDP ratio than South Africa, this is not the case when looking at emerging economies.
“If you compare South Africa to other emerging economies, our debt is high. We have very high debt when benchmarked against emerging economies,” he said.
He added that it has become unsustainable considering the rate at which South Africa’s debt is increasing.
Although growing government debt is a global phenomenon, South Africa is poorly positioned to deal with it.
The country has a small and weak currency, and economic growth remains constrained because of serious structural issues like load-shedding and Transnet’s collapse.
Investec chief economist Annabel Bishop expects South Africa to only see 1% economic growth in 2024. It aligns with the Reserve Bank’s 1.2%.
The low economic growth contributes to increased poverty and high unemployment. “We don’t have the needed fiscal depth any longer,” Roodt said.
He added that the government also does not have the needed skills and is, therefore, not equipped to deal with the country’s fiscal challenges.
“At the current trajectory, we are heading towards this scenario of a serious financial crisis,” Roodt said.