Government’s R20 billion interest rate windfall 

For every percentage point reduction in interest rates, the government’s costs to service its debt decline by between R7 billion and R8 billion. 

In the long run, a 1% reduction in interest rates also reduces the government’s borrowing requirement from R12 billion to R14 billion as part of the new debt issued by the state, which is used to pay existing debt. 

This is according to calculations by Old Mutual’s chief economist Johann Els, who used this to explain why it is so important for the government to reduce its deficit and limit debt issuance. 

South Africa’s debt burden has grown markedly over the past 15 years, with the last government surplus posted in 2008. 

When Finance Minister Trevor Manuel was replaced by Pravin Gordhan, the government’s spending taps opened widely. 

While the government’s significant spending was partly driven by the need to avoid the fallout from the Great Financial Crisis in 2008/9, much of it has been wasted. 

Without a corresponding rise in GDP, the government’s debt-to-GDP ratio surged and state spending on servicing debt began to balloon. 

For the past 16 years, the government has run a budget deficit, spending far more than it has collected in taxes and forcing it to issue debt to plug the gap. 

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

The government’s excessive spending was also coupled with weak revenue collection as SARS was gutted through state capture, and state-owned enterprises were saddled with unsustainable debt burdens.

Old Mutual Wealth investment strategist Izak Odendaal said that the Government of National Unity’s (GNU) biggest challenge will be continuing the trend of fiscal consolidation. 

“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.”

To illustrate the dire financial health of the country, Odendaal said 20 cents of every rand collected by SARS goes towards servicing the country’s debt. This means the government spends R1 billion a day paying off the interest on its debt. 

The state now spends more on debt-servicing costs than it does on basic education, social protection, or health. 

The growth of the government’s debt burden is shown in the graph below, with Nedbank’s forecasts compared to that of the National Treasury. 

There are signs that things are improving with regard to state finances, with the government posting a primary budget surplus earlier this year. 

This means the government brought in more from taxes than it spent, excluding debt-servicing costs.

While the government is still some distance away from posting a full budget surplus, a primary surplus is crucial in slowing down the growth of the debt burden and cutting debt issuance. 

Els explained that this is crucial in repairing South Africa’s investor credibility and reducing the state’s debt-servicing costs. This will ultimately free up billions of rands to spend on social protection and growing the economy.

Odendaal said the government’s reform program is also set to limit any increases to its debt-to-GDP ratio by boosting economic growth. 

The 2024 New Dawn is different from the false Dawn South Africa experienced in 2019, as key reforms are already underway.

“The new government just needs to keep its foot on the accelerator and not hit the brakes. But no one should be unrealistic. If everything had been easy, it would have been done by now.” 

He also explained that cleaning up the mess left by state capture will take longer than expected as its impact was far deeper than many thought. 

Relief is also expected to come from interest rate cuts as the Reserve Bank is firmly engaged in its cutting cycle.

The Reserve Bank has already cut rates by 25 basis points, and economists expect a further 75 basis points to be slashed by the middle of next year.