South Africa’s silver bullet

The only way South Africa’s financial challenges can be solved without difficult tradeoffs is through much faster economic growth. 

This is feedback from the head of fixed interest at Coronation, Nishan Maharaj, who outlined what South Africa needs to reduce its significant debt burden. 

South Africa’s finances have been deteriorating for over a decade, with the government last running a full budget surplus in the 2008/2009 financial year.

Since then, the country’s strong economic growth has halted, and government spending has begun to increase rapidly. 

Crucially for South Africa, the increased government spending did not translate into economic growth as much of it went towards social or public sector wages. 

As a result, the country’s debt as a share of GDP began skyrocketing and crossed 75% in the past financial year. 

With a larger debt burden comes higher debt-servicing costs, the fastest-growing expenditure item in the state’s budget and costing the government over R1 billion a day. 

This crowds out spending on other areas of the economy, including education, healthcare, and safety and security. 

Maharaj said this remains the Achilles Heel of the South African economy. Coronation expects the debt burden to steadily increase towards 80% of total GDP. 

However, the situation could be even worse than expected as unaccounted-for items continue to increase spending at a greater rate than expected, Maharaj explained. 

These include further support for state-owned enterprises (SOEs), with Transnet requiring funds more immediately than Eskom, but South Africa’s primary energy supplier might need another bailout if municipal debt keeps rising. 

Another major risk to the government’s fiscal consolidation plan is the continued above-inflation increases in public sector wages. 

While the government budgets for an increase, it often underestimates how much it ends up giving to state employees, resulting in deficits being revised higher and the debt burden growing further. 

South Africa’s general government debt burden as a share of GDP can be seen in the graph below, courtesy of Coronation. 

The government’s current plan for dealing with these challenges is fiscal consolidation, which entails the National Treasury keeping a tight lid on spending. 

A tight handle on spending growth has been coupled with improved revenue collection through vast improvements in SARS’ capacity. 

This has proven effective in the past few years, with the government running its first primary budget surplus in over a decade in 2023/2024. 

This means the tax revenue it collected was sufficient to cover government spending, excluding debt-servicing costs. 

The government is set to run another primary budget surplus in the current financial year, with tax revenue growing by 5.3% year-on-year compared to 4% growth in spending. 

This is vital for South Africa’s financial health as it slows down the growth in the debt pile and, over time, should enable the government to pay down its debt. 

Maharaj warned that fiscal consolidation could only continue if difficult decisions are made, such as limiting bailouts to SOEs, limiting public sector wage increases, and mothballing some of the government’s more ambitious plans. 

This would be very unpopular politically and is, thus, unlikely to happen, with the government having to search for a silver bullet. 

The only such option available is faster economic growth, as that will sustainably raise tax revenue and reduce debt as a share of GDP. 

Unfortunately, due to the slow pace of reform, the magnitude of real economic growth that is required in order to stabilise and then reduce the debt load is around 3% to 4% per annum. 

This is still some way off from Coronation’s growth expectation of 2% to 2.3% by 2026, which is heavily dependent on the sustainability of the GNU. 

As such, although the noise around the fiscal trajectory has quietened for now, the risks posed to the economy if implementation falters or growth fails to recover over the next two to three years are still very high.