South Africa heading for a serious financial crisis

Renowned economist Dawie Roodt said South Africa is heading for a serious financial crisis – which can happen quickly.

Roodt told the Afrikaans Radio podcast that South Africa’s finances are at significant risk of local and international shocks.

“We have so little fat in our finances that there is no shock absorber to mitigate or protect us against a crisis,” he said.

“This can lead to a serious financial crisis. I am sad to say that this is where we are heading.”

He said when the crisis hits, South Africa can go two ways –

• The Zimbabwe way, where the country will print money to cover its debt, leading to high inflation and a weaker currency.

• The Greece way, where the country was forced to make good financial decisions and structural changes to fix the economy.

“Although we will not become another Zimbabwe, it is a good example of where South Africa is heading,” Roodt said.

He explained that one of the challenges for South Africa’s government is its large amount of rand-denominated debt.

This money was lent to the state by pension funds, banks, insurers, and other local financial companies.

“At some stage, these institutions will stop lending money to the state because of the risk of not getting back their money,” he said.

“When this happens, it can be a good idea to borrow money from the International Monetary Fund in US dollars.”

This is because such a loan will come with conditions that make it easier politically to implement unpopular changes like cutting state spending.

However, another option is for the state, via the South African Reserve Bank, to print more money to repay debt.

This will lead to higher inflation and a weaker currency, which is where Roodt expects the country to be heading.

“I think within two to three years, we will see a significant weakening in the rand as this scenario plays out,” he said.

“By how much the rand will weaken will depend on how the South African Reserve Bank and fiscal authorities behave.”