South Africa in serious financial trouble with crumbling municipalities and SOEs

South Africa is in serious financial trouble, with the government’s debt burden expected to peak at close to 80% of GDP compared to a previous estimate of less than 75%. 

This is likely not the worst outcome, given the poor financial health of municipalities and state-owned enterprises (SOEs), which is expected to result in a further deterioration of the government’s fiscal health. 

The state’s deteriorating financial health is despite it recording consecutive primary budget surpluses in the past two financial years. 

This is feedback from the Reserve Bank in its first Financial Stability Review for 2025, which analyses the myriad risks to South Africa’s financial system. 

One of the significant risks contained in the review is the consistent deterioration of the government’s debt burden and ratios. 

The Reserve Bank said that despite the improved outlook for the government’s primary balance, there are various risks to the fiscal outlook. 

South Africa has recorded consecutive primary surpluses in the 2023/24 and 2024/25 financial years, with the last such surplus being seen in 2008/09. 

Improved market sentiment in the second half of 2024, due to the formation of the Government of National Unity (GNU), also compressed government debt yields, limiting the rise in debt-servicing costs. 

However, the Reserve Bank explained that the outlook for continued improvements in the state’s finances is highly vulnerable to domestic and global shocks. 

These shocks, including wars, tariffs, and government instability, have historically led to underperformance in the primary balance and an increase in sovereign debt. 

The projected borrowing requirement in the 2025/26 financial year remains elevated compared to the average of the past decade, making the country’s finances particularly vulnerable to shocks as it will have to raise debt in this environment. 

Over the decade from 2008 to 2018, the average borrowing requirement of the government was just less than R200 billion a year. In the 2025/26 financial year, the government is expected to raise just under R600 billion in debt. 

This is due to a combination of increased debt-servicing costs and the need to refinance debt that is coming due. 

The National Treasury’s gross borrowing requirement can be seen in the graph below, from the Reserve Bank’s Financial Stability Review for June 2025. 

Worse than expected

Along with the increased borrowing requirement, the Reserve Bank stated that there is a good chance the fiscal outcomes will be worse than expected. 

This is largely due to spending pressures on the government, with ailing SOEs and municipalities expected to continue to ask for financial support. 

It is also a function of the government continuously overestimating economic growth in South Africa and thus the revenue it is expected to collect. 

Similarly, it has routinely been overly optimistic about when its debt burden as a share of GDP would peak and begin to stabilise. 

The 2025 Budget Review from 21 May projected South Africa’s debt-to-GDP ratio to peak at 77.4% in 2025/26. 

This is higher than the 75.5% peak projected in the Medium-Term Budget Policy Statement (MTBPS) in November 2024, just six months earlier. 

The National Treasury’s data show that this is a relatively common occurrence, where the government overestimates its ability to rein in spending and stabilise its debt load. 

The Reserve Bank expects the current financial year to be no different, stating that the financial difficulties of numerous SOEs and municipalities pose a significant risk of further deterioration in the state’s fiscal position. 

“This may materialise in the form of potential bailouts – as has been the trend since 2017 – or the realisation of contingent liabilities,” it said. 

“Fiscal revenue shortfalls can lead to immediate budgetary constraints at a national, provincial, municipal and SOE level, in turn limiting the provision of critical infrastructure and services.” 

The Reserve Bank warned that this poses a risk to the local financial system, given its significant exposure to government debt. 

This makes them vulnerable to repricing risk, should the government’s fiscal position weaken further, in particular, if holdings are unhedged. 

The National Treasury’s forecasts for the government’s debt burden over the past few Budgets can be seen in the graph below, showing its continued overestimation of the ability to stabilise the debt load.