Finance

South Africa’s saving grace

While the government’s debt skyrockets year after year, South Africa’s corporate debt burden remains one of the lowest in the world, providing an important buffer to external shocks and adequate capital to invest in economic growth.

South Africa’s debt burden, including that of its state-owned enterprises (SOEs), is around 90% of GDP, far higher than the 75% quoted in budget documents. 

When household debt is added to this equation, the total burden is equivalent to 177.1% of GDP and is valued at $699 billion (R13.2 trillion). 

This is up from 141% of GDP at the beginning of 2014 and makes South Africa the 12th most indebted emerging market out of a list of 32 countries. Ten years ago, South Africa was ranked 16th.

In a research note, Stanlib chief economist Kevin Lings explained that since 2014, almost all the increases in South Africa’s debt as a share of GDP have been due to higher government debt. 

Government debt has risen from 42% of GDP in 2014 to around 75% by the time of the Medium-Term Budget Policy Statement (MTBPS) in October 2024. 

Furthermore, when the Institute of International Finance released its Q2 2024 estimates of global debt, it specifically flagged a shortlist of governments that have increased their debt at an especially rapid pace since 2009.

South Africa has ranked among the top ten countries with the fastest-growing level of government debt since then. “This is not a great way to be referenced in an international economic research document,” Lings said. 

The list did not include an estimate of how efficiently the increased government debt was utilised. Otherwise, South Africa would have been much nearer to the top of the list.

Lings explained that, more importantly, South Africa’s government debt burden has grown faster than the country’s GDP. 

Many countries that have increased their debt over the past ten years have been able to use those funds to develop the economy and create a sustained increase in economic activity.

South Africa’s public sector has not done that. The result is a massive increase in debt that has been accompanied by a slowdown in economic activity and a deterioration of South Africa’s credit rating. 

Under this circumstance, it would be unwise for the South African government to further increase their debt without first having fully repaired the state’s institutional capacity, Lings said. 

This would also have to be coupled with a sustained expansion of the tax base through a steady increase in employment.

This means economic policy needs to focus heavily on encouraging the private sector to invest and employ.

Fortunately for South Africa, Lings said, the non-financial corporate sector has been extremely conservative regarding spending over the past decade. 

Lings explained that a country’s economy generally needs strong balance sheets in at least two out of three sectors: government, households, and companies. 

This provides a substantial buffer to external shocks and enables investment in growth and not merely to stay operational. 

South Africa only has one strong balance sheet of those three, and that is for its corporates, which have not invested heavily in recent years due to political instability and poor economic prospects. 

As a result, their debt-to-GDP ratio dropped to 32.2% in 2024, which is extremely low compared to international standards. 

This ratio also includes the debt of South Africa’s SOEs, further revealing just how little private companies have been investing in the past decade. 

In comparison, non-financial corporate sector debt amongst emerging markets currently averages 93.5% of GDP. 

This is calculated using a GDP-weighted average, which means that China’s SOEs have had a huge impact on pushing up the ratio. 

However, even if you use an equal-weighted average, the ratio is still well above South Africa’s at 61.5% of GDP. 

Furthermore, within developed economies, corporate debt is currently up at 88.9% of GDP, which means that out of a list of 62 emerging and developed economies, South Africa’s corporate sector is one of the least indebted in the world.

Research from Old Mutual Wealth’s Cash and Liquidity unit shows that SA non-financial corporate deposits have grown by more than 9% this year to over R1.2 trillion in 2024.

This cash pile is only likely to grow in the near future, with the Reserve Bank’s data showing that companies increased their savings dramatically in the first half of 2024. 

Lings said the key reasons why companies are not investing in South Africa are the sustained low level of business confidence, a dearth of fixed investment in the private sector, and conservative financial management. 

While this has been unhelpful from an economic growth perspective, it highlights the need to encourage private-sector fixed investment and the expansion of capital stock and employment within all economic sectors. 

Lings said this is very unlikely to happen in isolation and in the absence of sustained higher economic growth.  

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