From budget surplus to debt spiral – South Africa’s rapid financial decline

South Africa’s state finances have been deteriorating for the past two decades, as the government consistently ran large budget deficits and has racked up a massive debt pile to fund its spending projects. 

In last week’s Budget Speech, Finance Minister Enoch Godongwana outlined the declining health of South Africa’s public finances. 

He revealed that the government would run a R347 billion deficit for the current financial year, with further deficits to come in the future. 

This means the government is spending more money than it collects through tax revenue. When the government runs a deficit, it has to fund it by issuing debt to investors. 

It is estimated that the government has had to issue around R500 billion of new debt in the current financial year to fund this deficit and refinance maturing debt. 

Running a budget deficit is not a bad thing in itself. However, if a government runs consistent deficits, then it may result in a debt spiral where new debt is issued to cover existing debt. 

That is exactly what the South African government has done since the 2007/08 financial year, when it last managed to balance the budget. 

Things changed quickly after Jacob Zuma dethroned Thabo Mbeki as ANC President. Pravin Gordhan took over from Trevor Manuel as Finance Minister, after which government spending spiked.

South Africa’s strong GDP growth during the Mbeki era stopped, and the country’s debt rapidly increased.

The trend accelerated under Cyril Ramaphosa’s presidency despite rhetoric from the president and finance minister pledging fiscal discipline. 

Since 2008, it has been 16 years of the government spending more than it collects, and the problem is only getting worse, with the deficit widening in recent years, as shown in the graphs below.

In its Macroeconomic Policy Review, the National Treasury said the rapid rise of public debt is the most important trend besides the country’s dismal economic growth. 

In 2008/09, gross loan debt amounted to R627 billion or 26% of GDP, with net loan debt at R526 billion or 21.8% of GDP. 

By last week’s Budget Speech, the government’s gross loan debt had reached R5.21 trillion, or 73.9% of GDP.

This has also seen the government’s debt servicing costs skyrocket. It is now one of the largest spending items in the budget. 

Godongwana said that debt-service costs will absorb more than 20% of revenue, with the country paying over R1 billion a day in interest on its loans. 

The accelerating deterioration of the country’s public finances is shown in the graph below, depicting the consistent budget deficits run by the government. 

The extent of the increase in the stock of debt, the pace at which this has been accumulated, and the slow pace of economic growth have impacted South Africa’s creditworthiness, as reflected in deteriorating sovereign risk ratings. 

South Africa now sits three notches below investment grade status according to the three major credit rating agencies. 

This is the key reason why interest rates are high by global standards, National Treasury said.

It added that increased concerns about sovereign risk and SA’s creditworthiness are a brake on future growth. 

South Africa’s high credit default swap premium reflects the cost lenders incur to insure themselves against a potential default by the country. 

Most economists say that a debt burden of greater than 75% of GDP is a significant weight on economic growth and indicates a growing potential for a debt spiral.