MARIE ANTELME: Debt quicksands loom for SA
South Africans are right to question the sustainability of the government’s debt position. Its commitment to austerity will be heavily tested
The post-Covid world will be a precarious place. Experience suggests that sovereign crises happen slowly at first, then very fast. SA cannot afford to waste the opportunity to do better.
Finance minister Tito Mboweni’s special appropriation budget tabled in June reflects the damage done by the pandemic to a weak economy. Critical to secure SA’s future is a commitment to stabilise debt, which will spiral out of control if nothing is done.
The government’s inability to rein in deficits over the past decade — either by stimulating growth or by cutting spending — is discouraging. However, past performance is not always a perfect predictor of future outcomes. There are powerful incentives to deliver, and an even more desperate economic imperative to help stimulate growth. Failure to grow will result in debt exploding — and risk the loss of market access.
Experience suggests that sovereign crises happen slowly at first, then very fast
This is how we see SA’s near future: we expect GDP to contract 9.8% in 2020 and to grow just 3.4% in 2021. The associated revenue loss is expected to be R314bn (6.1% of GDP). Spending is expected to rise R36bn, adding to the redirected R100.9bn, to complete a R145bn support package for the economy — as detailed by the National Treasury. The budget deficit is forecast to widen to 14.6% of GDP from 6.8% in 2019. Worryingly, gross government debt will rise from 63.5% to 82.4% in a year.
The government has committed to a painful consolidation of its spending. But the expected long-term fiscal woes and a weak starting position — low growth, poor policy execution, maladministration of state-owned enterprises (SOEs) and costly support of these entities — have made financial markets wary.
The dynamics of debt
Before the crisis, SA’s debt stock grew from 26.5% in 2008 to 63.5% last year. The International Monetary Fund (IMF) debt sustainability analysis shows that most of this deterioration was because of the large deficits run from 2010 to 2018 — an average of 4.9% of GDP over the period. The growing public sector wage bill, ongoing support for SOEs and weak growth are the reasons for this. In parallel, government financing needs accelerated from 2% of GDP to 12% in 2018, and will be an estimated 15.8% in 2020.
South Africans are right to question the sustainability of the government’s debt position. It may be able to cut some of its spending, but reducing it by a planned almost 8% over two years will simply not be politically possible.
However, unless much of the R101bn reallocated in this fiscal year is reversed, the government will be in a stronger position to limit spending in 2021 and 2022.
Mboweni has two powerful tools with which to impose some austerity — the reality that there is no money and the real risk that SA may need additional help from an international funder like the IMF, which will carry painful conditions.
So where can the government save up to R120bn? The permanent reallocation of some departmental spending and grant saving, the timely withdrawal of Covid-related support, and a more aggressive stance on public sector wages. We also expect taxes to rise, but see few meaningful tax levers to pull.
If the government pulls this off, the primary deficit will narrow from about 10% of GDP in 2020 to -3.2% in 2023 and -1.1% by 2025.
The time is now
There are signposts to watch. A growth strategy — starting with the allocation of spectrum later this year and progress with energy sector transformation — could boost productivity. The medium-term budget in October will give some indication of baseline spending allocations, even if there is no final resolution on the current wage dispute. Payments to SOEs outside of existing allocations will be the best indicator of the government’s resolve. And the February 2021 budget should provide a transparent framework by which the government is measurable and accountable to markets.
- Antelme is an economist at Coronation Fund Managers
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