South Africa running out of money

South Africa’s growing debt burden is the biggest threat to the country’s future as it is steadily heading towards a day when investors will no longer fund its budget deficits. 

For the past decade, the government has consistently outspent its revenue, and it expects to run a deficit of R347 billion in the current financial year. 

A budget deficit is not a major problem in itself. However, it becomes a significant threat to financial stability if it runs consistent deficits, which can result in a debt spiral where new debt is issued to pay off existing debt. 

This is South Africa’s biggest financial problem, according to Efficient Group chief economist Dawie Roodt. 

In a recent interview, Roodt outlined the current trajectory of South Africa’s government and the end result if nothing changes. 

“It is not only public debt that is the main problem. It is the rate at which it is changing and growing,” Roodt said. 

At the moment, the government’s debt-to-GDP ratio is around 75% and is growing at 2% to 3% every year as it continues to run a large budget deficit. 

However, this is only the debt held by the central government and excludes that of local authorities, such as municipalities and state-owned enterprises (SOEs). 

“You have to add in the local authorities and their debt because many of them are just not financially viable anymore. They are collapsing,” Roodt said. 

As a result, he warned that in the near future, the National Treasury will have to bail them out and take on their debt, growing the central government’s pile. 

The same applies to many of South Africa’s SOEs, which have experienced significant financial turmoil and are now turning to the government for funding. 

Roodt explained that this increases the government’s total debt burden by hundreds of billions of rands and makes a meaningful difference to its financial health. 

Including the debt held by local authorities and SOEs, South Africa’s debt-to-GDP ratio is significantly higher at 90%. 

“Every year, it increases by 2% to 3% relative to GDP. That debt needs to be funded. Somebody needs to lend money to the state,” Roodt said. 

“One day, they will say, ‘You owe too much money. You will not be able to repay me. I do not want to fund your deficits anymore’. This is the financial crisis I am talking about. That day will come if we continue on this trajectory.”

“We are heading for a financial crisis in South Africa. The state owes too much money. We cannot afford to spend like we do. The money is finished and klaar. There is no money.”

Currently, the government spends over R1 billion a day servicing its debt, as the interest on its R5.21 trillion debt pile has skyrocketed in the past decade.

How we got here

South Africa’s finances were not always in such a poor state, with the government even managing to run budget surpluses in the early 2000s. 

“The ANC in its first decade in power does much better at restoring economic stability and raising living standards than it was ever given credit for,” the head of the Social Research Foundation, Dr Frans Cronje, said. 

“You will continue to read, including in the business press, that the ANC has presided over an era of service delivery failure, which is plainly wrong on its facts.”

Under the Mandela and Mbeki administrations, the government gradually reduced its spending to cut its deficit, stabilise the currency, and grow the economy. 

Mbeki’s administration, in particular, saw the country run consistent budget surpluses, reducing government debt and enhancing its credit rating. 

The country’s sovereign credit rating hit a high of BBB+ under Mbeki, two notches above investment grade. 

However, this all came to an end in 2008 when Jacob Zuma dethroned Thabo Mbeki as the ANC president and Pravin Gordhan replaced Trevor Manuel as Finance Minister. 

Government spending rapidly increased, and as the economy stagnated, its debt-to-GDP ratio skyrocketed. 

Some economists argue that the crisis is fundamentally an economic growth problem, which is manifesting itself in the deteriorating government finances. 

The government’s skyrocketing spending did not result in economic growth as much of it was consumption-based and not directed to fixed investment. 

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, the government has spent more than it collected for 16 years, and the problem is only getting worse, with the deficit widening in recent years, as shown in the graphs below.

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

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