South Africa – from international sweetheart to fragile state

The rise and fall of the South African economy can be represented by the country’s sovereign credit status and its sharply rising debt-to-GDP ratio. 

Standard Bank’s chief economist, Goolam Ballim, outlined the contrasting fortunes of the local economy by presenting such a graph at the bank’s Economy 2024 event. 

He said 2024 would be a year of two halves for the country, with high levels of uncertainty in the build-up to the election, followed by a period of caution while the new government finds its feet and lays out its policy stance. 

But, to understand why the South African economy is in the current situation, you must appreciate its trajectory over the last 30 years.

Before the country’s first democratic elections in 1994, South Africa’s economic growth rates were declining.

Between 1985 and 1990, the economy’s annual average growth rate was 1.0%. It fell further to 0.2% between 1990 and 1994.

The country was battling rising debt and a weakening currency. Simply put, South Africa was heading for bankruptcy and needed urgent economic interventions.

To turn the ship around, then-President Mandela and Deputy President Mbeki focussed on creating and implementing a policy framework to reduce government debt and grow the economy. 

They planned to gradually reduce the fiscal deficit, avoid a debt trap, and limit any real increase in recurrent government expenditure.

The Mandela administration was able to stabilise the economy and achieve a steady growth rate of 2.7%. 

South Africa’s economy flourished under Thabo Mbeki. The government managed to run consistent budget surpluses, and the economy grew strongly at an annual rate of 4.1%. 

The country’s debt-to-GDP ratio was declining during this period, and, in turn, South Africa’s sovereign credit rating greatly improved, reaching investment grade (BBB) in 2002 and even going up to BBB+ in 2004. 

Things changed quickly after Jacob Zuma dethroned Mbeki as ANC President. Pravin Gordhan took over from Manuel as Finance Minister, after which government spending spiked.

South Africa’s strong GDP growth during the Mbeki era stopped, and the country’s debt rapidly increased.

The trend accelerated under Cyril Ramaphosa’s presidency despite rhetoric from the president and finance minister pledging fiscal discipline. 

This year, the country’s fiscal deficit will be around 6% of GDP. This means South Africa’s debt-to-GDP ratio for the current financial year will increase to over 75%.

However, the main issue is the lack of economic growth in South Africa, with many economists saying that the country’s growth crisis is manifesting itself as a fiscal crisis. 

Ballim said that Cyril Ramaphosa has a repair job on his hands and has not acted with the urgency the situation demands. 

If implemented, many of his policies are good and will resolve many of the country’s crises. 

The graph below, courtesy of Standard Bank and Ballim, shows the rise and fall of the South African economy through the lenses of its sovereign credit rating and debt-to-GDP ratio. 

In the graph, the debt-to-GDP is shown on an inverse scale.