Only one way out for South Africa

Given the increase in global uncertainty and the likelihood of elevated borrowing costs for longer, South Africa is under greater pressure than ever to get its fiscal and economic house in order. 

Old Mutual Wealth investment strategist Izak Odendaal said the only way to solve this is to improve economic growth and maintain a tight lid on government spending. 

Over the past forty years, the global economy has experienced several cyclical changes which have benefitted some countries and harmed others. 

One constant has been the presence of a rules-based international order promoting globalism and forming a tightly integrated economy. 

This is now being threatened, surprisingly, by the economy that has benefitted the most from this system – the United States. 

Trump’s imposition of tariffs on trading partners to extract concessions is a symptom of a fracturing global economy. 

Economic policy has taken an increasingly inward turn, with more support given to domestic industrial capacity, particularly in sensitive sectors like batteries and microchips.

As a highly open and small economy, South Africa is set to be significantly impacted by these changes, Odendaals aid. 

Trump’s return adds additional complexities because it threatens to undermine the US relationship with allies as much as with adversaries. 

The US President has also attacked South Africa, superficially because of domestic transformation policies, but the real reason is probably unhappiness about the country’s foreign policy priorities. 

If South Africa had not hosted the G20 this year, it might have slipped under the radar. But now it faces the possibility of losing duty-free access to the US market under AGOA, and further tariffs cannot be ruled out. 

This would be negative for its economy, though not catastrophic since about 8% of South Africa’s exports go to the US, Odendaal said. 

The broader impact on investment may be more severe, although it is too early to tell. 

This environment means that South Africa is under greater pressure than ever to get its finances in order by tackling its deteriorating state and stimulating economic growth. 

Odendaal said the fact that government debt levels look set to keep rising elsewhere doesn’t imply that South Africa has room to do the same. 

The government already spends 20 cents out of every tax rand on interest payments, a number that grows annually, leaving less money to spend elsewhere. 

The way out of this is credible fiscal consolidation to reduce borrowing and growth-enhancing economic reforms. 

The progress in fiscal consolidation to date has been mixed. Budget projections are made three years into the future, and for most of the past decade, economic growth tended to disappoint relative to the forecasts. 

For instance, the 2022 Budget projected that the economy would grow by 2.1%, 1.6% and 1.7%, respectively, in 2022, 2023 and 2024. The actual numbers were 1.9% in 2022 and 0.6% in 2023, while 2024 will likely end up being less than 1%.

Disappointing growth leads to disappointing tax revenue collections. Odendaal said there is limited room for tax rate hikes since the government already takes a large slice of national income. 

Meanwhile, spending pressures have been relentless, from social security to student funding to SOE bailouts, with no sign of ending. 

More immediately, the taxpayer will probably have to pick up the tab for the withdrawal of US funding, while a new public sector wage agreement will have to be accommodated as it is slightly larger than projected.

But there has been some progress on the spending side. Treasury has achieved a primary surplus for the first time since 2008, meaning that non-interest spending is now less than tax revenues.

The budget deficit therefore consists entirely of interest payments. If this trend is sustained, the government debt-to-GDP ratio will start bending lower. 

It will require ongoing political will in the face of demands for increased spending from various quarters, Odendaal said. 

Odendaal also explained that Elon Musk’s slash-and-burn approach is unlikely to work in this scenario. 

There is no doubt that there is waste to eliminate, but doing a DOGE in South Africa will hurt on a macro and micro level. 

At the macro level, deep spending cuts will weaken the economy, for instance, if many public servants lose their jobs. This will ultimately reduce tax revenues. 

At the micro level, indiscriminate cuts risk undermining important government work. Many government programmes will benefit from more digitalisation investment, for example, not less.