South Africa’s real debt burden

South Africa’s recently tabled mini-budget revealed that the country is edging closer to a fiscal crisis, with an effective debt-to-GDP ratio nearing 90% when factoring in debt from state-owned enterprises (SOEs) and local authorities.

This is according to feedback Efficient Group chief economist Dawie Roodt gave to Daily Investor. 

On 30 October, Finance Minister Enoch Godongwana delivered his Medium-Term Budget Policy Statement (MTBPS).

Roodt explained that this budget did not offer any major changes, as those will only be announced in the February Budget. 

However, he warned that South Africa’s state finances are “deteriorating once again”, which has become a pattern in recent years. 

The government’s planned fiscal consolidation – a strategy intended to stabilise the country’s fiscal health by managing deficits – has been postponed yet again.

“Put differently, the turning point for the debt-to-GDP ratio has been postponed again by another year or two,” Roodt explained.

The International Monetary Fund defines fiscal consolidation as the effort to bring down budget deficits, typically through spending cuts or tax increases. 

The goal is to align government spending with revenue to ensure long-term financial stability. 

South Africa has aimed at such consolidation before. For example, last year’s MTBPS outlined a “balanced approach” that combined spending restraint with revenue measures.

However, true fiscal consolidation has proven elusive for the country.

According to Daniel Makina, a professor of finance at the University of South Africa (UNISA), in its 30 years of democracy, South Africa has only had 13 years in which it achieved successful fiscal consolidations. 

At the moment, South Africa’s fiscal consolidation is aimed at reducing its exceptionally high debt-to-GDP ratio, which currently stands at over 74%. 

Roodt warned that if the economy doesn’t begin to perform better, the consolidation of state debt relative to GDP will take even longer. 

While the decline in fiscal accounts isn’t significant, it is notable.

Roodt explained that it is important to understand how the debt-to-GDP ratio is calculated. 

The government guarantees a large amount of debt from SOEs, and local authorities also owe sums. 

Ultimately, the Minister of Finance may need to bail these entities out, but this debt isn’t included in the official debt-to-GDP calculation. 

“If you include that debt, then we’re probably talking about a debt-to-GDP ratio in the region of about 90%.”

Roodt said that considering how much SOEs and local authorities have deteriorated financially, this really should be included in the national debt-to-GDP ratio. 

As an example, municipalities currently owe Eskom a staggering R85 billion, a figure projected to rise to R200 billion by 2028.

Only 14 out of 72 municipalities are paying as they should, which is putting the company at risk of needing another government bailout. 

Municipal debt remains one of Eskom’s biggest challenges, and this year, it has grown by R11 billion from April to August alone. 

Fortunately, Roodt said that over the last few months, there have been improvements in South Africa, and he expects the country’s economic growth to be around 1% to 1.5%. 

“I don’t think we are going to get close to 2%, or close to 1.8% as the Minister suggests, until we make some significant structural adjustments to the economy – and that is unlikely to happen,” he said. 

In the MTBPS, Godongwana also explained that there is going to be an expected R22 billion tax shortfall for this financial year. 

However, Roodt said that while taxes will likely come in below the budgeted amount, they won’t be as high as R22 billion. More likely, they will be R10 billion or less. 

While SARS has lost some tax income from areas which used to generate a lot of revenue, such as diesel, other areas, like two-pot retirement withdrawals, are helping to cushion the blow, according to SARS Commissioner Edward Kieswetter. 

Income and import taxes, which were also lower than expected this year, are likely to improve going forward, which could also help SARS avoid hitting the R22 billion mark.