One thing South Africa’s economy has going for it

Although the level of the South African government debt has increased, it is still better than many developed countries, says Adriaan Pask, chief investment officer at PSG Wealth.

South Africa currently has a debt-to-GDP ratio of 67.4%, which is expected to rise to over 71% in the next three years.

The debt servicing cost is roughly R400 billion annually, making interest payments on debt one of the fastest-growing expense lines.

However, Pask said that South Africa’s debt-to-GDP is quite reasonable when compared to other countries.

The United States’ debt ratio is 130%, the EU’s is close to 90%, China’s is roughly 80%, and Japan’s is 300%.

Pask said that central banks across the globe are raising interest rates to fight inflation, resulting in debt servicing costs growing, making it difficult to see where the governments will get the revenue to pay off their debts.

South Africa has entered into debt-consolidation agreements with the World Bank and the International Monetary Fund (IMF), but Pask said that consolidating our debt at lower rates is a major concern as growth remains muted.

He said that the global debt burden and rising debt servicing costs impact three of PSG’s avenues: households, government, and businesses and corporates.

From a household perspective, South Africa is in better shape compared to global markets, despite bonds and other debt repayments going up due to rising interest rates.

Nevertheless, the low levels of consumer disposable income will hit businesses, while debt service costs will also affect profit margins.

On a global scale, there has been a major fallout from rising rates as businesses look to cut costs. For instance, major tech companies – such as Google, Amazon, and Microsoft – have retrenched thousands of staff members.

Moreover, companies are trying to reduce their debt as interest rates rise from close to nothing. With capital being quite expensive, businesses are choosing to rather pay off some of the debt on their balance sheets instead of starting with share-repurchase programmes.

He added that ‘modern monetary theory’ complicates the government’s perspective as it states that a government can take on as much debt as it likes as long as it grows and repays the debt. However, growth may not manifest, so governments may just be adding more debt to their balance sheet. Some countries are now thus over-indebted.

For example, the US has reached its debt ceiling, but Congress may lift the debt ceiling in June 2023. The US would then incur even more debt, with some of it used to pay off maturing debt – meaning that it pays off its cheaper debt with more expensive debt, and the interest rate bill will continue to grow.

South Africa’s fiscal position is far less strained compared to other countries, however.

Finance Minister Enoch Godongwana said during the budget speech that the government needs to use the proceeds from tax collection to invest in the future. Pask said that this was heartening, but noted that South Africa needs to balance the taxes going to welfare with investments for future economic growth.

He said that managing non-interest expenditures and stabilising debt levels is crucial for the government, which aligns with good fiscal discipline.

He believes that governments will face funding or interest-rate bills that they previously have never encountered in the coming years due to their existing high levels of debt.