Dire warnings echo over South Africa’s financial problems

Efficient Group chief economist Dawie Roodt has warned that South Africa has run out of money and is facing serious financial problems.

Roodt said South Africa’s debt has increased enormously over the last fifteen years due to increased spending and low economic growth.

An important measure of a country’s debt is the differential between the nominal GDP growth rate and interest rates.

The Wall Street Journal’s chief economics commentator Greg Ip said a tipping point occurs when interest rates climb above a country’s nominal growth rate.

“At that point, the debt-to-GDP ratio will automatically rise unless the country runs a budget surplus, excluding interest,” he said.

South Africa’s slow economic growth over the last fifteen years means it has consistently had interest rates above nominal GDP growth.

As Ip predicted, South Africa’s slow economic growth and relatively high interest rates resulted in South Africa’s debt-to-GDP rising.

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.

Fifteen years later, the South African government’s gross loan debt had reached R5.21 trillion, or 73.9% of GDP.

Roodt said the negative trajectory started under former finance minister Pravin Gordhan when South Africa’s debt-to-GDP doubled from 25% to 50%.

He destroyed the good work of his predecessor, Trevor Manuel, who significantly reduced the country’s debt-to-GDP.

However, matters quickly changed after he handed the reigns to Gordhan. He gave huge increases to civil servants and state-owned enterprises received billions in bailouts.

The poor policies implemented under former President Jacob Zuma, with Gordhan as finance minister, continued after they left their positions.

South Africa’s debt-to-GDP accelerated and currently sits at 74%. However, it does not tell the full story.

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

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.

“Combining the state’s official debt and those of state-owned enterprises comes to around 90% of GDP,” he said.

Debt-to-GDP and interest rate comparison

Roodt developed a matrix that examines the state’s debt-to-GDP ratio in relation to the interest it pays on this debt.

“When you multiply the debt-to-GDP with the interest, you get a valuable number to compare with other countries,” he said.

He explained that the United States debt-to-GDP, which is 123%, is more manageable than South Africa’s because it only pays 4% interest on its debt.

“Because the United States have a far lower interest on debt, they can afford a much higher debt-to-GDP ratio,” he said.

When expanding the debt-to-GDP versus interest rate matrix to other countries, it emerges that South Africa’s debt burden is one of the highest in the world.

Roodt said this comparison shows that South Africa is in a dismal financial position and cannot afford things like the National Health Insurance (NHI).

“There’s no doubt that the money is finished, and it is certainly worse today than it was a year ago,” he said.

“We don’t want our debt to balloon to unmanageable levels to a point where we will not be able to deliver services.”

Roodt said there is some hope for recovery of South Africa’s finances, as a new government could fix the country’s fiscal crisis.

“The only hope for us is to get a good coalition which can slowly put measures in place to improve economic performance. But it’s not going to be easy politically,” he said.

The table below shows the debt burden of countries based on their debt-to-GDP ratio and the interest they pay on that debt.

To put these numbers in perspective, Kenya had to take drastic action to avoid default on its debt repayments in 2024.

Country	Debt burden to GDP
Kenya	11.96%
South Africa	9.76%
Brazil	9.51%
Namibia	8.82%
Uganda	8.14%
Bahrain	7.42%
Nigeria	6.89%
India	6.18%
Japan	5.61%
USA	5.59%
Mexico	5.30%
Mauritius	4.85%
Canada	3.65%
Israel	3.29%
Indonesia	2.84%
Qatar	2.57%
Botswana	2.32%
China	1.97%
Germany	1.76%
South Korea	1.63%
Australia	1.04%