High debt levels remain an enormous source of concern


Written by: Amanda Visser

Finance Minister Enoch Godongwana’s promises that South Africa’s enormous debt level will stabilize are simply not materializing. In addition, experts warn that the picture may look significantly worse in the near future, which has other negative consequences for the country’s economy.

Therefore, the plans that Godongwana presents during the budget speech on Thursday to pay off the debt will be listened to closely.

The debt level amounted to just over 70% of gross domestic product (GDP) in 2022.

According to the national treasury’s forecasts, this will rise to 75% this year and to almost 78% over the next two years. However, this appears to be conservative and the expectation is instead that the debt-to-GDP ratio will rise to 80% and even 85% of GDP.

Poor fiscal management

Exceeding the debt-to-GDP target indicates that the government’s fiscal management is unsustainable. This is a worrying trend, says Jana de Kluiver, researcher and Africa expert at the Institute for Security Studies (ISS) in Pretoria.

South Africa’s debt levels have already reached and are now on their way to R6 trillion. The budget deficit (the difference between income and expenditure) is already a gaping 4.9%.

“In the context of the country’s dwindling electricity network and the weakening of other infrastructure, as well as other economic challenges, it is important to find solutions as soon as possible,” she says.

In his Medium Term Budget Policy Framework, Godongwana acknowledged that things are not going as planned. “Too many government activities are inefficient, overlapping and non-critical, and the government does not generate sufficient revenue to service government debt over the long term.”

Loan debt increased by 47.2 percentage points between 2008 and 2022. The government uses the money borrowed mainly for salary increases for civil servants in the “labour intensive sectors” and to pay social allowance.

New debt, says the minister, is also more expensive debt. Instead of spending money on education, health or policing, South Africa pays R1 out of every R5 collected to creditors.

Value for money

How productively is our debt used? This, says De Kluiwer, is a rather loaded question.

“The answer will vary depending on which loan one refers to. A high debt-to-GDP ratio in that case probably indicates bad money management or unsustainable spending, as the economy is not growing at the rate needed to justify the high debt burden.”

She adds that debt can be a good thing if it is used in strategic sectors, but growing concerns about the sustainability of South Africa’s debt indicate that the debt is not being used productively.

The national treasury indicated in November last year that just the cost of servicing our debt in the 2024-25 tax year will amount to R385.9 billion. This rises to R455.9 billion next year.

According to Focus Economics, which publishes economic forecasts from the world’s leading economists, Botswana’s debt burden in 2022 was only 18% of GDP, while that of other countries in sub-Saharan Africa, such as Namibia (69.8%), Angola ( 66.7%), Mozambique (95.5%) and Zimbabwe (98.4%) are also on the high side.

Jean-Louis Nel, director at Van Huyssteens Commercial Attorneys, says South Africa’s debt burden can be reduced, provided strict fiscal policy is applied. “However, certain utopian ideas about salary increases for civil servants and the national healthcare insurance plan will have to end up on the shelf.”

The mess of junk status

South Africa currently borrows from foreign governments, international organizations such as the International Monetary Fund (IMF) and the World Bank, as well as foreign investors such as sovereign wealth funds or foreign banks. Foreign companies or entities can invest directly in the South African economy through loans.

De Kluiver says South Africa’s junk status has a negative impact on its bargaining power when negotiating loan terms with its creditors. Credit rating agencies are not impressed with the creditworthiness of a country with a junk investment status.

A junk rating indicates that the government may be unable to meet its debt obligations. This makes borrowing more expensive, as creditors demand higher interest rates, or shorter repayment periods, to make up for the increased risk.

In addition, a junk rating could limit access to international capital markets and reduce investor confidence, further limiting its ability to negotiate favorable terms for loans.

“In general, South Africa’s junk status undermines its ability to obtain money on favorable terms, which worsens its debt burden and makes it more difficult to manage its financial obligations effectively,” warns De Kluiver.

The pressure of debt distress

Although South Africa’s debt exceeds the regional average, it is important to realize that individual countries within the region can differ significantly in their debt levels and fiscal management strategies.

According to the IMF, since 2023 almost half of African countries are in . South Africa is not yet in debt distress, but due to the debt trajectory, experts believe, the country is quite possibly on its way there.

Should the government fail to repay its debt, this will lead to a flood of negative consequences, including a further downgrade of our investment status. “This will probably lead to the withdrawal of foreign investments which will have a direct negative effect on our GDP,” warns Nel.

The cost of our loans will become even more expensive, inflation will rise to “unparalleled levels” and the value of the local currency will tumble, he adds.

De Kluiver believes this will further undermine investor confidence with negative economic consequences, such as an increase in unemployment.

High levels of unemployment and poor service delivery by the government can lead to socio-political unrest as South Africa has already experienced in KwaZulu-Natal.