RANDALL CAROLISSEN: African sovereign debt, a recipe for falling off the fiscal cliff

Briefing the media on the sidelines after the cancelled SA national budget announcement of February 18 in Cape Town, the secretary-general of the ANC stated, in as many words, that SA has run out of runway when it comes to raising sovereign debt.

Debt consolidation also remains elusive as revenue after debt servicing costs remains too meagre to realistically provide the infrastructure and catalysts on which economic platforms can be established.

The finance minister’s proposal that VAT be raised from 15% to 17% to close the budget deficit was like a household where the drunken father has maxed out the family credit card and the only way to survive is to starve the kids.

SA has reached a watershed in its young democracy, and the inefficacy and inefficiency of government spending can no longer be papered over by incurring more unsustainable debt. With economic growth in the doldrums the country traverses a precipitous fiscal path — the national debt plateaued at a little more than $300bn in December.

SA’s debt-to-GDP ratio is sitting at 72%, having escalated from the average of 54% in the decade preceding 2022. Debt servicing levels have risen relentlessly, from 9.75% of revenue in 2009/10 to 20.7% in 2023/24. Debt repayments are projected to cost the SA taxpayer R382bn in 2024/25. This inability to consolidate sovereign debt has resulted in SA’s credit rating sinking to junk status, perpetuating this and other negative feedback loops.

This phenomenon is by no means unique to SA, but rather typifies the precarious fiscal position of the developing world post the economic disruption of the Covid-19 pandemic. According to the World Bank’s latest International Debt Report, developing countries paid a record $1.4-trillion on foreign debt in 2023, a 20-year high. Interest servicing costs surged nearly a third to $406bn, crowding out budgets in areas critical to the attainment of the UN sustainable development goals (SDGs).

Supported by a low global interest environment in the wake of the 2008 Great Recession, which raised the appeal higher yield Sub-Saharan African bonds held for global credit markets, the region saw 25 consecutive years of economic growth up to 2020. However, adverse shocks to Sub-Saharan African economies during Covid included slipping trade volumes, disruptions to supply and global value chains, shrinking tourism and other services industries, and declining remittances.

Strained economies became vulnerable to defaulting as the volatility in African currencies propelled inflationary forces and exchange rate depreciations, which increased the costs of debt servicing. Africa’s sovereign debt soared 183% from 2010 to 2023, with debt servicing costs following suit, eroding tax revenue collections. Last year African countries paid $102.6bn servicing external debt. This slump has had a negative effect on the credit ratings of African counties, cycling into negative feedback loops.

By way of comparison, though Japan has a debt-to-GDP ratio of more than 200% — way above any African country — because of its favourable credit rating it has a debt service obligation of only 10% of its GDP.

Unchecked sovereign debt has resulted in credit downgrades, both economic and liquidity debt distress, reduction in access, or outright rationing out of the credit markets altogether. African countries access future financing at steeply higher costs, while their Covid-precipitated financing needs escalated. The widening spreads and dearth of new euro bond issuance paints a worrying and deteriorating African distress map post Covid.

Proposing fresh reforms to the international financial architecture, UN secretary-general Antonio Guterres warned that African countries’ inadequate access to debt relief and scarce resources was a recipe for social unrest. Indeed, in 2023 debt servicing charges in Kenya rocketed to an unsustainable 58% of revenue collected and a government attempt to close fiscal deficits with tax hikes sparked countrywide demonstrations. Social unrest over the rising cost of living spilt over to Nigeria and Uganda.

The 54 countries with the most severe debt problems include 28 of the top 50 most climate-vulnerable nations in the world. Debt restructuring therefore cannot be postponed until interest rates drop or a global recession occurs.

UN Development Programme administrator Achim Steiner said debt relief “would be a small pill for wealthy countries to swallow, yet the cost of inaction is brutal for the world’s poorest. We cannot afford to repeat the mistake of providing too little relief, too late, in managing the developing economy debt burden.” 

As country’s debt is measured by means of the debt-to-GDP ratio, virtuous cycles are created through higher GDP growth, which assists with faster debt consolidation. In other words, a country can reduce its debt using economic growth to ease out of it.

As a rule, governments roll over debt and use economic growth to reduce sovereign debt metrics. Such a positive trend finds favour with debt agencies and may result in improved country ratings, reducing overall debt servicing costs.

The relentless pursuit of economic expansion to alleviate debt levels to improve credit ratings and drive down debt servicing costs stands in stark contrast to the ideals of proponents of sustainable development. Economic growth requires more energy and resources to support investors, with attendant sustainability problems for the planet that are inevitably weighted towards developing nations.

Food security

As things stands now, Africa will suffer disproportionally from adverse effects from climate change in all its manifestations, but especially food security. Carbon credits as a means to balance out undesired fossil fuel wastes between economic divides further entrench and perpetuate growing polarity between the worlds of poverty and abundance, which coexist in an extremely unhealthy tandem.

This is the conundrum faced by developing nations that are crippled by sovereign debt. They are caught between the proverbial devil and the deep blue sea.

• Dr Carolissen is a former head of research at the SA Revenue Service and dean of the Johannesburg Business School.