HYLTON HOLLANDER AND ROY HAVEMANN: How South Africa stumbled into a fiscal trap
Ever-increasing debt servicing costs and unforeseen shocks could throw off the Treasury’s plans for fiscal stabilisation
Over the past decade, the interest rate that South Africa pays on its debt has consistently been above the economic growth rate. Mathematically, this means that debt grows as a percentage of GDP. It becomes a “vicious circle”.
Higher debt makes investors and ratings agencies nervous, meaning the interest rate they are prepared to pay for our debt rises. This increases borrowing costs and hurts investment spending, making fiscal consolidation (and counter-cyclical fiscal policy) more and more difficult, making the fiscal position worse and raising the sovereign risk premium. The interest rate rises again and the cycle continues...
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