In 1999, South Africa’s debt burden had become heavier after local interest rates rose sharply in the wake of consecutive crises in emerging markets.
In his budget speech that year, then finance minister Trevor Manuel reflected on the financial distress endured by other countries during the period, including Russia, which ended up defaulting on its debt.
In spelling out South Africa’s predicament, Manuel used a common analogy. “Like any household, the government cannot spend what it does not have, and increasing the level of indebtedness will simply make us vulnerable and threaten our transformation agenda.”
Today, as the country awaits the next update on the state of its public purse, the prospect of a debt crisis seems more imminent than before. This is as South Africa’s fiscal position has deteriorated markedly during the course of this year, a dilemma that could see the treasury inflicting another round of spending cuts.
However, despite the commotion surrounding South Africa’s supposed descent off a fiscal cliff, the country isn’t teetering on the brink of a debt crisis — not yet, anyway.
Debt is not inherently bad for an economy, although it is sometimes framed that way. “I think in some cases it is linked to the idea of the household budget, which suggests that if you spend more than you have you’re likely to run out of room to spend and eventually reach a crisis,” Zimbali Mncube, a researcher at the Institute for Economic Justice (IEJ), explained in an interview this week.
Mncube was one of more than 100 experts and organisations who wrote an open letter calling on President Cyril Ramaphosa and Finance Minister Enoch Godongwana to halt all planned budget cuts.
Godongwana will table his medium-term budget policy statement next week. In the months leading up to the minister’s speech, the treasury has sought to impress on the government the extent of the country’s current fiscal setbacks. Some of this correspondence has been leaked to the media, creating the picture that the state is running out of money.
In a letter to department and provincial heads in August, the treasury prescribed a raft of cost containment measures, including freezes on hiring and infrastructure projects. The treasury cited “unprecedented challenges” in the 2023-24 financial year, brought on by chronically low economic growth, revenue shortfalls and unfavourable debt market conditions.
The treasury followed up that letter by making those guidelines public. The latter document said cost containment is required to prevent the materialisation of “potentially crippling resource constraints”.
Meanwhile, another leaked document suggested that the treasury presented to Ramaphosa various cuts that would be needed to fund the social relief of distress grant, including closing certain government programmes. But the treasury maintained that the leaked presentation was not an accurate reflection of the discussion with the president.
In the face of the treasury’s manoeuvring, the open letter to Ramaphosa and Godongwana disputed the view that South Africa is on the brink of a fiscal crisis. “A sense of panic is being created in order to force through these rushed, chaotic and indiscriminate cuts in the medium-term budget policy statement in November 2023,” it reads.
“If implemented, these cuts will slow economic growth, undermine service delivery and curtail social protection, thus exacerbating unemployment, hunger and social instability, leading to a retrogression in the realisation of the socio-economic rights contained in our Constitution.”
The letter also called the cuts “self-defeating” as the austerity-induced economic contraction would make debt repayment more difficult. “Rather, the fiscus must be leveraged to set South Africa on a new economic path,” it said.
In a policy brief released ahead of Godongwana’s speech, the IEJ said economic expansion is the best defence against the feared debt crisis. According to the IEJ’s analysis, South Africa doesn’t face an immediate debt or liquidity crisis. The economy does, however, face a growth crisis.
“If you zoom in on the current debt levels, they do not indicate that we are at crisis proportions,” Mncube said, noting that South Africa’s 71.4% debt-to-GDP ratio is in line with those of other emerging market countries.
That said, South Africa’s debt trajectory does not look good, given that the country’s borrowing has consistently exceeded revenue since 2009. The cost of the state’s debt has also steadily increased.
There are two big reasons why South Africa’s debt service costs are so high, according to the IEJ.
The first is that the country’s foreign-denominated debt — only about 11.7% of total public debt — has been subject to adverse exchange rate movements, which have added R5 billion in debt servicing costs. Second is the fact that most of South Africa’s debt is long-term. Longer-term debt is more expensive to service.
Stanlib chief economist Kevin Lings agreed that a fiscal crisis is not an imminent reality. “South Africa’s fiscal position is precarious,” he said.
“And the reason it is precarious is that you’ve got two elements working against you. The one is that debt service costs have risen dramatically. It’s going to be about 20% of revenue and obviously that is high by any standard, by historical standards and by international standards. And it appears to be rising quickly.”
The second element driving South Africa towards a fiscal cliff is low economic growth, which stands to narrow the tax base, Lings said.
He said South Africa’s fiscal crisis has been precipitated by international factors, namely tight financing conditions and little political will to implement economic reforms.
If the government is unable to implement any of these measures and economic growth continues to disappoint, then South Africa will face an outright fiscal crisis, he said.
“We will get further credit rating downgrades. It will become more difficult to fund ourselves. And it can start to become self-reinforcing. In other words, because your fiscal deterioration is ongoing, bond yields go up, investors want a better return to buy your bonds, which makes the cost of financing more difficult,” Lings noted.
“We are very clearly heading towards a fiscal crisis. Are we there yet? No. We have still got the ability to rein it in, to reverse it, to rectify it.”
Although Lings suggests reducing government expenditure — specifically on the consumption side — will help the state avoid a fiscal cliff, the IEJ contends that cuts will hinder growth, accelerating the debt crisis.
Herein lies the dilemma: economic expansion is crucial to avoiding fiscal crises. But, without spending, or taking on further debt, it is near impossible to inspire growth. Meanwhile, countries such as South Africa face considerable pressure to pare back spending.
“Cutting back government spending works in the opposite way than is intended,” Mncube said. “Whilst the view that supports the cut is that government spending is essentially crowding out private investment — and therefore it should be cut in order to bring in private investment — we say that, in a context where there is such low demand in the economy, it is actually government spending that is likely to stimulate the economy.”
Because the debt-to-GDP ratio is measured based on the size of the economy, a contraction stands to worsen this indicator.
Lings agreed that the government is in a difficult position given that fiscal discipline constrains its ability to borrow and dole out economic stimulus. He suggested, however, that the government could change the composition of its spending — allocating more to investment and less to consumption — or it could partner more actively with the private sector.
The IEJ’s remedies fly in the face of this more conservative approach, proposing, for example, that the government borrow more. Increased borrowing should happen alongside a credible growth plan, as well as efforts to access credit on more favourable terms.
The IEJ also proposes that the government raise additional revenue by removing tax breaks on high earners, re-evaluating corporate tax subsidies, implementing a wealth tax and a resource rent tax, restoring the corporate income tax rate and clamping down on illicit financial flows.
The think-tank suggests the government also undertake a thorough spending review, but this ought to be done transparently and by consulting various stakeholders.
Mncube suggested there is some danger in accepting the most prevalent view on South Africa’s public finances as truth.
“It’s sort of easy to fall into the dominant view and take it as something that is true without questioning it. If everyone, including the government, is saying that the state is running out of money it is easy to take that on.
“I think there is a need to do more to get people to read the budget and understand how things work and not use the analogy of the household … It implies that austerity is equal to saving, when in the real world it equals starvation and higher inequality.”
See “Is South Africa nearing a debt crisis?”
This article forms part of the third instalment of The Fiscal Cliff, a monthly series by the Mail & Guardian on the state of South Africa’s public purse. The series looks into the effect of fiscal consolidation on public services — which have steadily deteriorated over the years — and considers this policy’s impact on the country’s growth prospects. You can read the other article in part one of the series here.