How an interest rate hike could impact South African investors

Lesetja Kganyago

PSG Wealth CIO Adriaan Pask said ballooning global government debt has led to central banks across the world raising rates to combat inflation, which has a marked impact on households, businesses, and the government.

Global government debt ballooned during the Covid-19 pandemic after steady growth for decades.

Currently, South Africa has a 67.4% debt-to-GDP ratio that – while tame compared to many other countries – is projected to grow to 71% over the next three years.

Interest rate payments on South Africa’s debt are one of the country’s fastest-growing expense lines. South Africa’s debt servicing costs currently amount to R1 billion a day. 

Considering the country’s rising debt burden, it is important for the South African Reserve Bank (SARB) to keep inflation within the target band to secure government revenue and avoid increasing government spending.

The SARB needs to do this while still enabling economic growth.

To dampen inflation, the SARB has increased the country’s interest rates significantly, placing South Africa firmly in a hiking cycle.

The SARB is set to do so again in an upcoming MPC meeting at the end of March, where experts expect the repo rate to be raised by 25 basis points.

The SARB building in Pretoria.

Impact on investors

Pask said the global debt burden and rising debt servicing costs must be considered when structuring investment portfolios because it impacts investors on three levels: households, corporates and business, and government.

South African households are generally considered better off compared to global markets. However, they are still impacted when interest rates rise, as bond and other debt repayments increase alongside rates.

This leads to lower levels of consumer disposable income, which will also impact businesses – big and small.

As consumer spending goes down, businesses will feel the impact of rising interest rates on their top line and profit margins.

The fallout of rising interest rates can already be seen in some businesses going to the extreme to curb costs.

This can be seen in companies like Google and Amazon, which have recently announced large-scale layoffs, with Google laying off more than 10,000 employees.

“Companies are also increasingly paying down debt as interest rates rise from near zero. Capital is no longer for free. In fact, it’s quite expensive,” he said.

“For example, businesses are therefore choosing to pay off some of the debt on the balance sheet, rather than embarking on share-repurchase programmes.”

The impact of rising debt servicing costs becomes more complicated on a government level.

This is because governments can take on as much debt as possible – as long as they “grow out of it”.

“The risk is that growth does not manifest. Then you essentially pile on more and more debt onto your balance sheet,” Pask said.

“This has resulted in some nations being over-indebted, and we’ve become concerned that their growth will be insufficient to repay these debts in some cases.”

PSG Wealth CIO Adriaan Pask

On the bright side

While South Africa’s economic growth rate is not on the same level as some of its global peers, Pask believes the country’s fiscal position is – relatively speaking – in a far less strained position.

In comparison, the US debt-to-GDP ratio is 130% – almost double South Africa’s. The US reached its debt ceiling in January 2023 and is considering raising it again to allow it to take on more debt.

“This means that the US will incur even more debt, some of which will be used to pay off maturing debt. This effectively means that the US will use more expensive debt to pay off cheaper debt, and the interest rate bill will keep rising.”

Pask said he was also heartened by finance minister Enoch Godongwana’s budget speech, wherein he mentioned that South Africa must use its tax revenue to invest in the future.

“We have a good portion of our taxes going to welfare, but we need to balance that against investment for future economic growth.”


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