SIZWE GODIDE-MBELE: Debt stabilisation trajectory should not be forsaken

“In the distance I see a frightful storm brewing in the form of untethered government debt. I choose the words ‘frightful storm’ deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the government will be unimaginably more devastating to our economic prosperity than the sub-prime debacle and the recent debauching of credit markets that we are working right now so hard to correct”. These words by former Dallas Federal Reserve president Richard Fischer seem appropriate for South Africa’s debt situation.

Germany is reported to have approved a fresh round of development funding for South Africa amounting to €355m (R6.3bn) in a combination of grants and subsidised loans over the next two years. These funds are to be dedicated to supporting climate change initiatives and supposedly come with favourable interest payment terms and friendly time frames.

The fight against climate change is undeniably virtuous, a progressive war we should embrace. Scientists and environmentalists warn that any delay in embarking on initiatives aimed at reversing the adverse effects of climate change will bring about catastrophe. Decisive action is therefore needed.

However, we should pay closer attention to the multiple grants and loans the country continues to receive from concerned institutions and countries. This is important in the context of our sovereignty and the fiscal consolidation the National Treasury continues to preach — albeit without real, trackable progress.

A perusal of past budget speeches indicates that the finance ministry frequently vows to ensure “fiscal and debt sustainability through growth-friendly fiscal consolidation to place public debt on a declining path”. One would therefore hope there are concrete plans to reduce government deficits and debt accumulation.

There are several levers available to adjust when seeking to achieve fiscal consolidation, including reducing the public sector wage bill, efficiency in revenue collection, and growing the economy. It is also critical to laser-focus on the worrisome increase in the sovereign debt and concomitant debt service costs. New loans, even on “favourable terms”, seem incongruous with the stated commitment to fiscal consolidation and debt stabilisation. There is no free lunch: grants and loans come with conditionalities.

Like many other countries, particularly in the developing world, SA received various grants and loans to support government's efforts to combat the adverse effects of the Covid-19 pandemic on livelihoods and lives. The assistance came in various shapes, including development funds, loans and support to pursue energy programmes to combat climate change and growth enhancement initiatives to counter the adverse economic and health effects while seeking to reconstruct the economy. In truth though, when used haphazardly and largely for consumption, these measures are merely adding further to the burden of an already constrained budget, as service costs are ever increasing. 

SA’s national debt is the total quantity of the money borrowed by government at any time through the issue of securities by the Treasury and other government agencies. It refers to the total amount of international and local debt held by government accounts — for example, government trust funds, revolving funds and other special funds.

Generally, government debt as a percent of GDP is used by investors to measure a country’s ability to make future payments on its debt, thus affecting the country’s borrowing costs and government bond yields. As of 2021/2022 the total government debt was R4.3-trillion, which is projected by the Treasury to rise to R5.4-trillion over the medium term. Finance minister Enoch Godongwana has noted that “[the country] incurs large debt-service costs; averaging R330bn annually over the [medium term expenditure framework] … larger than spending on each of health, policing or basic education”.

By June this year the country’s debt accounted for 70.1% of GDP. While this ratio was fuelled by the Covid-19 pandemic, which prompted the use of expansionary fiscal and monetary policies to an extent that is unprecedented in modern times to keep the economic wheels rolling, it would be foolhardy to deny that the economy was already floundering. The 70% debt-to-GDP ratio represented a deteriorating state given that the previous quarter had recorded 68%. The reality is that for many countries, expansionary fiscal intervention in the form of loans and grants has worsened their debt quagmire.

Nevertheless, when Covid-19 hit we applauded the prudence of the National Treasury as we recognised that roughly 90% of the national debt in 2019/20 was denominated in rand. Domestic-denominated debt reduces borrowing risk when faced with exchange rate volatility and capital flight. SA was considered better off than most as foreign currency loans constituted only about 10% of government bonds. When domestic bonds held by foreign investors moved to 28.2% in December 2021 (a 10-year low), Godongwana tried to pacify stakeholders by predicting that government debt would peak at 75.1% of GDP in 2024-25 and then gradually decline.

Sovereign debt

However, we are aware that even in previous engagements with the ratings agencies, fiscal consolidation and stabilisation of debt trajectory were raised ad nauseam over several years. In February this year, Fitch Ratings cautioned SA about rising debt levels and concluded that “the country is not doing enough to contain its rising debt, despite better (than expected) revenue windfalls”. As citizens who care and understand that we did not inherit this country from our forefathers but have borrowed it from our children, we should bravely ask: is our government doing enough to reduce the sovereign debt owed to foreign and domestic creditors?

Emerging from what the IMF termed “formidable challenges” created by the Covid-19 pandemic, the Treasury said fiscal policy had to balance supporting economic recovery with rebuilding public finances. There is a consensus that recovery is urgently required, and there are green shoots. But like taxes, recovery cannot rely on the accumulation of debt. This is even true when there is no noticeable productive trajectory. Which projects are these loans going to? Are these projects kick-starting the economy and driving employment? The unemployment figures are worsening. One can hope that we are not using debt to meet our insatiable appetite for consumption.

The outcome of the IMF’s Article IV consultation with SA, held between November 17 and December 7 2021, is telling as it viewed our growth recovery, at least in the near term as “lacklustre medium-term performance [….] with the economic output capped by structural constraints, weak confidence and less-favourable terms of trade.” The IMF also said an ambitious and growth-friendly fiscal consolidation over the next three years is necessary to reverse the risky upward trend in the debt ratio and reduce high financing costs while protecting well-targeted social expenditures and investments.

Perhaps the Treasury can inculcate confidence by (re)tabling its implementation plan on fiscal consolidation and the stabilisation of the debt trajectory in our consolidation episode. In particular, the granular details at what debt level and cost Treasury would become concerned about solvency and crowding out issues. Everyone seems to know the objectives, but actions tend to repudiate them. The lack of details or focus indicates that the Treasury is incuriously and insouciantly accepting whoever is giving loans and making up the plan as it goes along. Treasury knows better; there is a level of government debt service that impedes growth and service delivery.

Excessive and unaffordable debt can never be a panacea for our socioeconomic illness. There is good debt — when we prudently use borrowed money to fund sustainable, productive projects. And of course, there is bad debt — when we use debt for consumption or projects that do not generate sustainable economic development. South Africans are ready to rally behind the former, but bad debt will lead to further downgrades, increase the cost of living further, and burden coming generations. Our immediate tasks to achieve a positive economic trajectory and build confidence should include a fiscal consolidation path, with specific emphasis on debt review and efficiency in expenditure.

Full disclosure is paramount. Transparency on our debt situation should be the starting point. Then we should comprehensively re-evaluate our spending and enforce better governance fundamentals.

• Godide-Mbele is an independent consultant on project finance & strategy.