SA ‘running out of road’ on national debt

The piling up of South Africa’s national debt is threatening to push the country to the brink of an economic catastrophe, unless the government acts innovatively to address the problem.

The country could be slowly sliding to a point of no return as the debt continues to spiral upwards, while economic growth slows down.

A country’s creditworthiness is measured in terms of its ratio of debt to gross domestic product (GDP) and, with ballooning debt and slower growth, the picture isn’t rosy.

This was observed by the economic development think-tank, Centre for Development and Enterprise, which months prior to Finance Minister Tito Mboweni’s medium-term budget policy statement identified the slow rate of economic growth and the vast increase in public debt as the two phenomena that affect the country’s position.

The centre’s executive director Ann Bernstein noted Mboweni’s forecast of annual economic growth was revised downwards to 0.5% and revenue from tax collection was likely to be 4% lower than February’s estimate. In 10 years’ time, debt levels could exceed 80% of GDP, she said.

“These numbers are astonishing and demand a bold response from policy-makers.”

In a background report released in August, entitled Running out of Road: South Africa’s public finances and what is to be done, the centre stated that as important as the debt-to-GDP ratio was to assessing creditworthiness, the perceived risk of extreme outcomes is at least as important.

“Thus, to the extent that a rising ratio of debt to GDP is understood to reflect bad governance that could also lead to other bad outcomes, its impact on perceived creditworthiness and on growth will be greatly magnified. This factor is a significant one in SA,” the report said.

Had economic growth been higher, more tax would have been collected and there would have been less need to borrow in order to fund the gap between revenues and spending.

In addition, faster growth would have meant the economy was larger, so the ratio of debt to GDP would have been lower.

“It is hard not to be horrified at the rapidity of the accumulation of public debt over the past 10 years, a decade in which South Africa’s creditworthiness has fallen dramatically.

“This has resulted in deteriorating credit ratings, reflecting the increasing unsoundness of our macroeconomic fundamentals.

“It is, nevertheless, important to understand that the deepening fiscal crisis has, to date, been primarily a result of, rather than a cause of, slower growth,” the centre said.

“The precarious state of the public finances is one of the reasons why our growth performance has deteriorated, and why it is likely to continue to deteriorate until there is a substantial improvement in our fiscal position,” the report said.

Wits Business School finance expert Dr Thanti Mthanti, said South Africa lacked a credible short-term growth plan.

Economies that were not growing and had debt problems often slipped into bankruptcy.

South Africa must produce a primary surplus of 2% to 3% of GDP consecutively in the next three years, among others.

The centre cited two proximate causes for the explosion in public debt. The first is the gap between revenue and government spending on government’s budget that emerged in 2009 and which has not been closed in the intervening years “and the result is that debt has piled up at an unprecedented rate”.

Effectively, a sharp decline in tax revenues in the immediate aftermath of the global financial crisis was not accompanied by a decline in spending.

Slow growth is a key driver of the rapid build-up of public debt. But, given the weight of the debt and the rapidity of its increase, lines of causality now work the other way, too.

For more news your way, download The Citizen’s app for iOS and Android.