South Africa’s money problem

South Africans received good news recently when it was announced that the country achieved its first primary budget surplus in 15 years.

However, the government’s massive debt pile means the country remains in the red—and will remain so for years to come.

In June this year, it was announced that South Africa achieved a primary budget surplus – when revenue exceeds non-interest expenditure – of R31.6 billion or 0.4% of gross domestic product in the year through March 2024.

In the South African Reserve Bank’s Quarterly Bulletin, the central bank attributed this surplus to a stern approach to funding state-owned companies that have drained government finances.

“The decline in non‐interest expenditure was driven by lower voted expenditure, largely owing to the sharp decline in payments for financial assets, reflecting government’s limited recapitalisation of state-owned companies,” the central bank said.

The data shows that Finance Minister Enoch Godongwana was firm about funding debt-stricken state companies like ports and railways operator Transnet. 

It provides relief only if they meet strict conditions, including implementing recovery plans and selling non-core assets. Godongwana did not provide new bailouts to state-owned companies in his February budget.

The minister also reduced Eskom’s debt-relief funds after it failed to meet conditions attached to a R254 billion package the utility was granted last year. The utility has been accessing the funds in tranches.

This is a positive sign for the economy and will likely boost local assets and investment in the country.

However, it is important to note that South Africa posted a primary surplus rather than an overall surplus, and this is where the problem lies.

A primary surplus means that the government’s revenue exceeded its expenditure, excluding debt servicing costs, and it is a significant step towards fiscal sustainability.

However, when the substantial amount spent on servicing the national debt is included, the picture changes, and it’s highly likely that the overall budget will still show a deficit.

The issue lies in South Africa’s significant debt burden and the substantial interest payments on this debt. Even with a primary surplus, the government may still need to borrow to cover these interest payments.

The country’s debt-to-GDP ratio is 74.1%, well above the emerging market average of 58.9%.

Of all the taxes collected in South Africa, 20% go to servicing the government’s massive R5.2 trillion debt. 

In other words, one in every five rands of South Africa’s revenue goes to debt-service costs, which now absorb a larger share of the budget than basic education, social protection or health.

This substantial debt burden directly results from South Africa’s rapidly declining financial health in the past decade, with big increases in government spending not translating into meaningful economic growth. 

The national government has run a budget deficit for almost two decades, with the last surplus seen in the 2007/8 financial year when Trevor Manual was Finance Minister. 

Simply put, for nearly two decades, the government has been spending more than it collects through taxes and funding this expenditure by raising debt. 

While a deficit is not bad, running consistent deficits can result in a country entering a debt spiral where new debt is issued to service existing debt. 

South Africa has not reached this point yet, but its debt burden continues to grow every year.

The government aims to stabilise its debt-to-GDP ratio at around 75.3% in 2025/26, but many experts believe this target might be optimistic.

Old Mutual investment strategist Izak Odendaal told Daily Investor that the depth of destruction under President Zuma was far worse than many people realised at the time. 

After coming to power in 2008, Zuma swiftly placed Pravin Gordhan in charge of the nation’s finances, after which spending spiked and the economy stagnated. 

This was coupled with weak revenue collection as SARS was gutted through state capture, and state-owned enterprises were saddled with unsustainable debt burdens. 

Odendaal said cleaning up the mess will take time. Fiscal consolidation is the trickiest problem for the new government to tackle, especially since new coalition partners have big ideas for their first term in power.

“South Africa cannot afford not to stabilise a debt-to-GDP ratio that has almost doubled in the past decade and tackle a debt burden that has reached R5.2 trillion,” he said. 

“It is relatively easy for the various coalition partners to agree on feel-good economic reforms that lead to private investment and photo opportunities for hard hat-wearing politicians.” 

“It is much more difficult to commit to being disciplined with state money when each party has its own spending priorities.”

Positive signs

Reducing the government’s debt will take immense time and effort, but some positive signs are appearing.

For example, the National Treasury announced in the February Budget that it plans to draw down on the country’s Gold and Foreign Exchange Contingency Reserve Account (GFECRA) and introduce a new binding fiscal anchor that should moderate government debt. 

This will go a long way in reducing the government’s debt burden, although many economists have warned that it is not a silver bullet.

In its 2024/25 Budget, the government claimed that the GFECRA would allow it to reduce debt without any increased costs or risks. 

However, Professor Stan du Plessis of the Bureau of Economic Research (BER) said this is not true. 

If the R150 billion the government wants from the account is raised by selling forex reserves, confidence in South Africa will be undermined as these reserves are a vital buffer against external shocks. 

This will also negatively impact the country’s sovereign credit rating, but the government’s improved financial health following the debt reduction may negate this effect. 

However, there are other positive developments that will also contribute to lowering the government’s debt burden.

For example, the government’s hard stance on SOE bailouts bodes well for its ability to rein in spending over the next few years.

Another positive sign is that interest rates globally are set to come down later this year, which will benefit South Africa’s debt servicing costs.

If South Africa needs to borrow money to finance its debt or for other purposes, it can do so at a lower interest rate. This reduces the cost of servicing new debt.

A decrease in local interest rates – which usually follows global rate cuts –would also reduce the cost of servicing existing debt.

Another factor working in the government’s favour is that a large part of the country’s debt is not held in foreign currencies.

This protects South Africa from foreign exchnage fluctuations, as the value of the rand can be volatile. By having a significant portion of debt denominated in rand, South Africa is less exposed to the risk of increased debt servicing costs due to currency depreciation. 

In addition, a weaker rand can make it more expensive to service foreign-currency-denominated debt. A predominantly domestic debt portfolio mitigates this risk.