South Africa

Good news about South Africa’s finances

South Africa’s finances have been in decline for nearly two decades, with the government running deficit after deficit.  However, improved revenue collections so far this year could see room for fiscal consolidation.

It is important to note that South Africa has not always been in poor financial health. In the early 2000s, the country often ran a budget surplus.

However, consistent deficits from 2008 onwards have severely harmed the country’s fiscus.

The ANC achieved remarkable economic success in its initial decade in power, following years of stagnation under Apartheid. 

Under the leadership of Nelson Mandela and Thabo Mbeki, the ANC implemented a comprehensive policy framework to restore economic stability, reduce government debt, and promote economic growth.

In that time, the ANC successfully stabilised the economy, addressing issues such as rising inflation, currency depreciation, and increasing debt levels.

South Africans, particularly those in previously disadvantaged communities, also experienced increased living standards.

In addition, during this period, the government implemented measures to reduce its debt-to-GDP ratio, leading to consistent budget surpluses.

All of these factors contributed to South Africa’s economy’s robust growth, which averaged 4.1% annually during Mbeki’s presidency.

However, South Africa’s economic fortunes began to decline after Jacob Zuma replaced Thabo Mbeki as ANC president. 

Zuma’s administration was characterised by increased government spending, corruption, and a decline in investor confidence. 

These factors contributed to a significant deterioration in the country’s economic performance.

Under Zuma, the government’s expenditure significantly increased, leading to budget deficits and a growing debt burden.

The country’s debt-to-GDP ratio steadily increased, reaching unsustainable levels. Consequently, the government’s debt servicing costs skyrocketed, consuming a significant portion of its budget.

Economic growth slowed down significantly in this period, hindering the government’s ability to generate revenue and manage its debt.

Things did not get much better under Ramaphosa, as the government’s debt increased further and the budget deficits continued.

Decades of fiscal mismanagement have left the country facing significant challenges, including rising debt, sky-high debt servicing costs, and slow economic growth. 

South Africa’s financial decline can be seen in the graphs below, courtesy of Investec.

However, there is some light at the end of the tunnel, as the 2024 Medium-Term Budget Policy Statement (MTBPS) is expected to see some fiscal consolidation.

Investec chief economist Annabel Bishop said the MTBPS, which will be presented on 30 October, is not expected to weaken the country’s fiscal metrics.

She attributed this to revenue collections being meaningfully higher than a year ago and at 42.4% of the budget estimate, near expenditure of 43.1% for the same ratio.

Bishop explained that, in 2023, the collapse in global commodities prices and South Africa’s freight crisis saw revenue collections drop to 37.5% of the budget estimate by August 2023.

With expenditure at 43.1% for the same period, this led to a significant widening of the country’s budget deficit.

However, in 2024, savings from the profits of the Gold and Foreign Exchange Contingency Reserves Account (GFECRA) were used to counteract part of 2023/24’s revenue shortfall and limit borrowings.

The deficit to date this year is R151.6 billion, significantly below R237 billion for the same period last year. 

Bishop said that if expenditure is contained, updated gross loan debt ratios will have room to be projected lower than in the February Bidget, which would be a positive outcome for markets.

The gross loan debt for the current fiscal year, 2024/25, was projected at 74.2% of GDP in February, peaking at 75.3% in 2025/26 and then declining towards 67% of GDP by 2030/31. 

South Africa’s budget deficit for 2024/25 was initially projected at 4.5% of GDP.

However, Bishop said this target is likely to be revised to around 4.3%, with 2025/26 estimated at 3.7% and 2026/27 at 3.3%.

“A below budget fiscal deficit would be received very positively by financial markets, allowing for a lowering in debt projections, and so projected debt servicing costs, and reducing South Africa’s credit risk,” she said.

In September, rating agency Moody’s said South Africa would need to see a significant lowering of its government debt profile and signs of rehabilitation of its freight infrastructure to get a credit rating upgrade. 

Finance Minister Godongwana has also said that cost-cutting measures are planned, which he is expected to elaborate on in the MTBPS.

Another matter that is expected to be addressed in the MTBPS is lowering South Africa’s inflation target.

For years, the South African Reserve Bank has highlighted the need to lower South Africa’s inflation target to bring it closer to that of the country’s key trading partners.

South Africa’s target range is currently 3% to 6%, while its key trading partners have targets closer to 2%.

Bishop said lowering of the inflation target is a change that the National Treasury would make, as it is responsible for setting the inflation target, while the Reserve Bank is responsible for achieving it.

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