90% – The number that should terrify the South African government

Efficient Group chief economist Dawie Roodt said the South African government’s true debt-to-GDP ratio is around 90% – much higher than the official 74%.

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

In 2008/09, gross loan debt amounted to R627 billion, or 26% of gross domestic product (GDP), and net loan debt was R526 billion, or 21.8% of GDP.

Fifteen years later, the government’s gross loan debt ballooned to 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.

Finance Minister Enoch Godongwana said debt-service costs will absorb more than 20% of revenue. The country is paying over R1 billion daily in interest on its loans.

As bad as it seems, it still does not tell the full story of South Africa’s financial problems and rising debt burden.

Roodt said the government’s debt could not be considered in isolation and should be seen in combination with state-owned enterprises.

He highlighted that around 75% of municipalities are not financially viable. They owe Eskom around R80 billion, which increases every month.

The finance minister would have to cover this debt in one way or another, as the situation is unlikely to improve.

“These numbers, where the state has to step in to bail out local authorities, are not disclosed anywhere,” Roodt said.

Municipalities are critically important to the economy as they supply households and businesses with water, electricity, and roads.

Another big expense for the government is state-owned enterprises. Although their debt is reported slightly more transparently, it is never fully disclosed.

The combined debt of Eskom, Transnet, and other state-owned enterprises amounts to around R600 billion.

The state guarantees most of this debt, which should be considered part of the government’s liabilities.

Not all of this debt will be the state’s responsibility. However, history tells us that most of the money will have to come from the government.

The finance minister did not allocate funds for this debt in his latest budget, which will impact the government’s finances.

Efficient Wealth economist Dawie Roodt

Roodt said the government’s current outstanding debt is around 75% of South Africa’s gross domestic product (GDP).

“The state’s debt levels increase by around 2% to 3% annually relative to GDP. The fiscal deficit is around 5% of GDP,” he said.

A concern is that South Africa has nearly no economic growth, which means there is no clear path to reduce the debt burden.

“That means the source the government uses to fund its growing expenses is under pressure,” Roodt said.

He said combining the state’s official debt and those of state-owned enterprises comes to around 90% of GDP.

Citadel chief economist Maarten Ackerman said a country typically enters a debt spiral when its debt-to-GDP ratio reaches 90%.

He said South Africa has not yet entered a debt spiral, but avoiding it will require making tough choices.

The World Bank has also warned that a country whose debt exceeds 77% as a percentage of GDP for prolonged periods experiences significant slowdowns in economic growth.

If a country’s debt is above this threshold, each additional percentage point of debt costs 0.017 percentage points of annual real growth.

The effect is even more pronounced in emerging markets, like South Africa, where the threshold is 64% debt-to-GDP ratio.

In these countries, the loss in annual real growth with each additional percentage point in public debt amounts to 0.02 percentage points.

“The cumulative effect on real GDP could be substantial. Importantly, the estimations control for other variables that might impact growth, such as the initial level of per-capita-GDP,” it said.

South Africa is already on the wrong side of the debt-to-GDP ratio and should avoid going deeper into the red.

Reducing debt should be at the top of the new South African government’s agenda, as economic growth is crucial to creating jobs and addressing social ills.


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