Africa-Press – South-Africa. South Africa’s economy is not growing fast enough to stabilise the government’s debt burden as a share of GDP, with it set to continue to grow despite National Treasury projections showing otherwise.
The National Treasury has consistently forecasted a peak in the debt-to-GDP ratio in every budget since 2009, which is still yet to materialise.
Finance Minister Enoch Godongwana said earlier this year that the 2025/26 financial year will see the debt burden peak as a share of GDP before beginning to decline.
This is due to the National Treasury’s policy of fiscal consolidation, which has resulted in successive primary budget surpluses.
With the government on track for a wider surplus than initially expected, this could be the year that the state’s debt burden finally peaks.
Coronation’s economics unit, however, urged caution, saying that South Africa’s economic growth is not sufficient at current rates.
In an analysis of South Africa’s long-standing economic challenges, Coronation explained that its baseline shows the country’s debt-to-GDP ratio will continue growing into the 2030s at current economic growth rates.
This would be catastrophic for the country, with the Reserve Bank warning that even at current levels, South Africa is at risk of entering a debt trap.
South Africa is already in an unsustainable financial situation, as the interest rates owed on government debt are higher than the country’s nominal economic growth.
This means that South Africa’s debt-servicing costs are compounding at a faster rate than the country’s economy, making it unsustainable over the long run.
Debt-servicing costs already amount to over R1.2 billion a day for the government, crowding out spending in other areas of the economy, including education and healthcare.
These costs are on track to take over social grant payments in the coming three years, according to the National Treasury.
While others are positive regarding the potential to stabilise South Africa’s debt burden, Coronation is more cautious in its analysis.
“If growth remains in the painfully weak 0.5% to 1% range, current fiscal allocations, even with tough consolidation and a rising primary surplus, will not be sufficient to stabilise the debt trajectory,” it said.
“Debt continues to rise relative to GDP, crowding out investment, raising borrowing costs, and diverting resources away from social and capital spending.”
A decade of promises
The National Treasury has projected a stabilisation in the country’s debt burden for over a decade. In practice, this has proven far more difficult to achieve.
While it has been projected with hard data, the stabilisation date has consistently been postponed, resulting in South Africa’s debt-to-GDP ratio rising from 24% of GDP in 2010 to over 75% in 2025.
Each postponement, while often seeming legitimate at the time, has had a cumulative effect and now puts the country on the edge of a financial crisis.
Following the Finance Minister’s several budget speeches earlier this year, Coronation’s head of fixed interest, Nishan Maharaj, explained why this is the case.
While the National Treasury remains committed to its policy of fiscal consolidation by financing new expenditure through revenue increases, there is often a crucial mismatch.
The increased expenditure tends to be recurring and fixed, implying any fall-off in growth and thus tax revenue will create a large funding shortfall.
This increases the risks of a higher debt load and results in the government taking on new expenditure projects that it cannot finance in the long run.
Furthermore, the National Treasury accounts for its debt-servicing costs on a cash basis rather than traditional accrual accounting methods.
Maharaj explained that this results in it setting up its debt accumulation forecasts for disappointment. In other words, it accumulates more debt than its forecasts.
Therefore, the risks are heavily skewed towards a worse budget outcome going forward if economic growth does not recover significantly.
Maharaj argued that economic growth of 3% per annum is needed to stabilise the government’s debt load and begin to improve its financial health.
Even this faster economic growth will amount to South Africa’s debt-to-GDP ratio peaking at 80% of GDP, rather than the 76% forecasted by the National Treasury.
This growth rate is also much higher than anything South Africa has achieved over the past decade, with growth averaging 0.8% per annum. It is also forecasted to only grow at 1.5% per annum for the next three years.
Source: dailyinvestor
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