What the end of the line in South Africa can look like

Renowned economist Dawie Roodt said South Africa’s debt trajectory is unsustainable and painted a picture of what the end of the line could look like.

Roodt told Mike Sham from the State of the Nation podcast that there will come a time when local institutions will no longer fund the state.

He explained that South Africa’s debt-to-GDP ratio is around 75% and growing at 2% to 3% every year. This is because the country runs a large budget deficit.

Currently, the government spends over R1 billion a day servicing its debt, as the interest on its R5.21 trillion debt pile has skyrocketed in the past decade.

However, this does not tell the full story, as the state is also partly responsible for municipalities and state-owned enterprises (SOEs).

Many SOEs and municipalities are bankrupt, and the National Treasury will have to bail them out and take on their debts.

Including the debt held by local authorities and SOEs, South Africa’s debt-to-GDP ratio is significantly higher at 90%.

This growing debt burden places increased risk on the financial institutions holding the debt, which can stop them from supporting the state in future.

“One day, they will say, ‘You owe too much money. You will not be able to repay me. I do not want to fund your deficits anymore’,” Roody said.

He explained that this would cause a financial crisis, which the country should avoid by not taking on any more debt.

Simply put, the government should cut spending and increase economic growth to start producing a surplus and use this money to reduce debt.

“We are heading for a financial crisis in South Africa. The state owes too much money. We cannot afford to spend like we do. There is no more money,” he said.

What the end of the line could look like

Sham asked Roodt what the end of the line for South Africa could look like. Hence, what can cause a financial crisis, and what can people expect in such a scenario?

Roodt said a possible scenario is Donald Trump being elected president of the United States.

In this scenario, if South Africa aligns itself with China and Russia, it could anger Trump, who is strongly focused on American interests and could take measures to punish South Africa.

This may include stopping South Africa’s African Growth and Opportunity Act (AGOA) benefits and preventing US companies from buying the country’s debt.

This may cause Europe, which is closely aligned with the United States, to do the same and prevent its financials from funding South Africa.

In such a scenario, the result would be a downward spiral, which could cause tremendous damage to the local economy.

“The United States and Europe will start selling South Africa’s debt instruments, which will cause long-term interest rates to go up,” Roodt explained.

This, in turn, will weaken the local currency, and the Reserve Bank will need to increase short-term interest rates.

These factors will slow down economic growth, and there will be upward pressure on inflation in the country.

“The country will be saddled with a weak economy, a weak currency, high inflation, and high interest rates. We don’t want to be there,” he said.