Godongwana warns skyrocketing debt threatens fiscal health

South Africa’s finance minister said introducing fiscal rules makes sense, as stagnant economic growth due to incessant power cuts and logistical constraints are hindering efforts to rein in swelling debt.

Finance Minister Enoch Godongwana announced plans to introduce a binding fiscal anchor in the year ahead when he tabled South Africa’s budget last month in order to provide a sustainable long-term path for public finances. 

South Africans need to discuss that given “our debt servicing costs are rising enormously, is there a scope of saying let’s try and reduce” the debt to gross domestic product ratio and lower debt service costs, Godongwana said in an interview with Bloomberg in Sao Paulo on the sidelines of a Group of 20 meeting of finance chiefs and central bank governors last week.

The country’s debt-to-GDP ratio, which stood at about 24% in 2008, is expected to peak at 75.3% in 2025-26, down from 77.7% estimated by National Treasury in November. 

The improved outlook is partly due to plans by the government to tap a portion of the funds in the country’s Gold and Foreign Exchange Contingency Reserve Account held at the central bank to pay down its debt. GFECRA will be restructured to free up R150 billion over three years.

Still, while markets largely welcomed the move, it’s viewed as a short-term fix, unlike stronger economic growth.

“Our major challenge” to lowering the debt-to-GDP ratio is a growth issue, Godongwana said, which is compounded by a murky outlook for the country’s electricity and logistics sector. “They pose a major risk,” he said.

The annual economic growth rate of Africa’s most industrialized nation in the past decade has averaged less than 1% because of endemic corruption and constraints at its power, port and rail operators.

Godongwana has previously said that for the fiscal anchor to become binding, it will need political buy-in.