South Africa’s debt has increased substantially over the years Photo Pexels
South Africa – Four point seven trillion rands. This is the peak the government’s debt looms over the country at. Finance Minister Enoch Godongwana announced the R4.7 trillion government’s debt at the beginning of the month. Debt servicing costs stand at R355 billion a year.
In 2008/09, South Africa had a government debt of R627 billion. With the global economy slowing and inflation increasing, it doesn’t look like things will be getting better anytime soon.
The debt load has grown substantially in the last 13 years because of spending commitments and spending growth that has increased while revenue has remained stagnant. This is according to economist, Reezwana Sumad. The danger of this is how debt impacts interest rates and spending.
“The problem with debt is that it comes at a cost in terms of interest repayments and that has been ballooning over the last two years. The problem from a budgeting perspective is that if we had a lesser debt and a smaller interest repayment, we could use those funds elsewhere in terms of spending on other infrastructure or social commitments. That is a key concern that as the debt load grows it will essentially crowd out spending out in other areas.”
Closing the gap on debt
Financial markets are becoming more volatile as the global economy slows down. The result of this is debt-service costs are estimated to be R5.9 billion higher in 2022/23 than what was first expected. Government plans to reduce this by reducing annual deficits. What can also help in closing the gap is the higher-than-expected tax revenue they have collected, said Sumad.
“They’ve had overruns in tax revenue collection purely as a result of higher commodity prices and better revenue collection. For now they seem to be in a bit of a comfortable space whereby tax revenue collection has beat their initial estimates. They are now able to fulfil a lot of the debt application obligation.”
While this will help in the short-term, in the long-term things won’t be so easy as the government has decided to take on Eskom’s debt. This will increase debt and it will most likely get worse. Another uncertainty is how interest costs will fluctuate as inflation and global interest rates will fluctuate.
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Price correction in the market and the slowing global economy
Over the past year South Africa has had rising inflation rates. While that has negatively impacted the cost of living, it boosted the Rand value of our Gross Domestic Product (GDP) and the size of our economy. The price correction in financial markets is likely to do the opposite. There are also other dangers to worry about.
“We’re likely to see that price correction over the next year and that is likely to result in a smaller nominal GDP size of the economy as opposed to what we have been previously forecasting. However, there are other dangers lurking from a global economic landscape perspective. The global economy is slowing quite rapidly in 2023. The International Monetary Fund and the World Bank have warned that it’s the first time in many decades that global growth is slowing. South Africa’s growth is also slowing but inflation and interest rates may remain very elevated. We have never seen this synchronised global slowdown combined with high inflation and high interest rates.”
Servicing the Eskom debt
To service Eskom’s debt, Godongwana intends to reprioritise spending elsewhere. As the debt load begins to grow, Sumad believes more spending will be cut to be able to pay off the debt. Interest costs are the second fastest growing item in the budget from an expenditure perspective.
“You’re going to see other areas of spending having to unfortunately be cut to be able to accommodate and be able to afford growing debt and growing interest costs … As our debt and interest costs grow, we will have to cut spending elsewhere to be able to accommodate this larger debt load.”
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Not all is doom and gloom
Eskom has already applied to increase the price of electricity. According to Sumad, this will only ensure that the cost of living worsens and inflation rates remain high. However, there is some good news for South Africans.
“The one aspect we know is that the National Treasury is holding its guard against tax increases. Our tax rates have risen over the last five or six years. The National Treasury is almost against increasing tax rates over the medium term. The other aspect is that the government has collected a much higher tax revenue relative to what they were expecting for this year. They’re using at least 45% of this tax over collection to reduce the borrowing requirements.”
