South Africa in dire straits
At its current trajectory, South Africa’s public debt is projected to reach 88% of GDP in the next five years, an unsustainable level that could severely harm the local economy.
Business Leadership South Africa CEO Busi Mavuso warned of this in her latest newsletter, which stressed the importance of fiscal reform in South Africa.
The International Monetary Fund’s (IMF) latest Fiscal Monitor painted a bleak picture of South Africa’s economy. It warned that, unless the government tightens fiscal policy, public debt will rise to 88% of GDP by 2030.
This is significantly higher than the 73% level that the National Treasury is aiming for in its planned fiscal trajectory, which is why the IMF has called for South Africa to take additional measures to reduce its debt level.
The organisation suggested South Africa target 60% to 70% and downgraded the country’s GDP growth forecast for 2025 from 1.5% to 1.0%.
The IMF’s concerns about South Africa’s debt levels come as the country’s fiscal future remains uncertain amid the 2025 Budget debacle.
The National Treasury has had to configure two budgets for the country so far this year, with a third expected to come soon.
Therefore, it is difficult to determine with certainty where South Africa’s fiscal health stands and what the government’s plans are for addressing its shortcomings.
Finance Minister Enoch Godongwana revealed in the so-called “Budget 2.0” that South Africa’s debt-service costs will amount to R389.6 billion in the current financial year.
“This translates to 22 cents of every rand we raise in revenue. It is more than what we spend on health, the police and basic education,” he said.
“We must reverse this trend and prevent the cost of debt from taking away resources that could otherwise be spent on our pressing social needs, or invest in growth.”
The National Treasury’s full Budget Review explained that South Africa’s gross borrowing requirement declined from R457.7 billion at the time of the 2024 Budget to R415.7 billion in 2024/25.
This was largely due to lower debt redemptions due to the government’s bond-switch programme.
It said that, in 2025/26, the gross borrowing requirement is expected to be R3 billion higher than projected in the 2024 Budget Review due to a higher budget deficit.
The National Treasury also expects South Africa’s gross loan debt to stabilise at 76.2% of GDP in 2025/26, slightly higher than the 75.3% projected in the 2024 Budget, and decline thereafter.
This is far more optimistic than the IMF’s projections, which see South Africa’s debt-to-GDP ratio reach 88% by 2030 without sufficient government intervention.
The graphs below show the National Treasury’s outlook for South Africa’s debt over the next few years.
South Africa must act now
Mavuso said this situation, with the country’s economic prospects having worsened so sharply since January, demands that the government focus on areas it can control.
She said this includes the country’s debt trajectory, where South Africa has to prove the IMF wrong.
“If debt does rise to 88%, it will be even more difficult to reduce it from that level, and then there is a real danger that it spirals out of control, which could force the country to turn to the IMF-bailout route, which would be devastating,” she warned.
Renowned economist Dawie Roodt recently explained to Biznews that an IMF loan to a country is not the same as a bank loan to a client. Rather, the IMF assists countries with balance-of-payment problems.
These problems occur when, for example, South Africa needs to pay off a dollar-denominated debt but does not have enough dollars in its reserves to do so. In this case, South Africa could borrow dollars from the IMF to pay off this debt.
Luckily, Roodt explained that South Africa will likely not face this problem, as the South African Reserve Bank has sufficient dollar reserves and most of the country’s debt is rand-denominated.
Mavuso said South Africa can also reverse its downward trajectory and improve conditions by controlling its reform process, with Transnet being a major focus area.
Iron mining giant Kumba’s recent statement showed the significant impact logistics reform could have on South Africa’s economy.
The statement showed that, despite the reforms of South Africa’s rail systems still being in their very early stages, the improvement in Transnet’s rail performance supported a 6% increase in Kumba’s iron ore sales volumes.
“This is a small step, but it is important: as recently as 2022, the Minerals Council reported that the mining industry lost R50 billion because of Transnet’s inability to export their minerals due to the dysfunctional rail system,” Mavuso said.
“The country needs efficient transport and logistics systems and a secure energy supply, not only to boost domestic economic activity but also to attract foreign investment and increase trade volumes.”
Mavuso also applauded government efforts to mend South Africa’s relationship with the United States, but said it is also crucial to expand the country’s trade with existing and new markets.
“Being able to boast of significant progress in our reform agenda will facilitate both foreign direct investment and increased trade,” she said.
Comments