South Africa targets debt sustainability despite borrowing surge

29 Oct 20

Government debt is set to rise for the next five years in South Africa, but officials hope to keep public finances sustainable by slashing the deficit, the country’s finance minister said while presenting the 2020 medium-term budget policy statement.

Tito Mboweni told MPs the Covid-19 pandemic, combined with “recent fiscal weakness” – the budget deficit widened to 6.3% of GDP in 2018-19 after sitting at 4.2% the year before) – left the government at risk of a sovereign debt crisis.

To stave off that crisis, the government has set out a five-year “fiscal consolidation pathway”, intended to promote growth and bring debt under control.

Gross debt will rise from around 4trn rand (£187.5bn) this year to 5.5trn rand (£257.7bn) in 2023-24.

The government is currently borrowing at a rate of 2.1bn rand (£98m) a day, which Mboweni said is unsustainable.

“We must be careful to avoid the fate of countries such as Argentina and Ecuador that defaulted on their debt this year,” he said.

“Countries that find themselves in default see sharp GDP contractions and currency depreciations. On current trends, more of our taxes are being transferred to bondholders than to critical services for our people.

“Uncontrolled increase in borrowing costs would harm small businesses, ordinary South Africans and the poor the most.”

But by cutting the deficit from 266bn rand (£12.5bn) in 2021-22 to 84bn rand (£3.9bn) two years later, and aiming for a surplus by 2025-26, the debt-to-GDP ratio should stabilise at about 95% in five years’ time, Mboweni said.

The government expects a 7.8% contraction of GDP this year, and although it recognises 2021 is “uncertain”, it predicts growth of 3.3% as the recovery gets underway.

The medium-term plan includes spending on utilities, infrastructure, social housing and further measures to support jobs during the recovery from the crisis.

To reduce the deficit, it includes plans to end above-inflation public sector pay rises, reduce support for the state-owned power company Eskom and reduce the cost of corruption, which Mboweni said had been heightened by the pandemic.

The government also plans to introduce ‘zero-based budgeting’, a method that requires all expenses to be justified in each new budget, by 2023.

“Some might ask: can we not just spend our way out of the present crisis?” Mboweni said.

“Certainly, in 2009, when we had debt of 31.5% of GDP and the real yield on government debt was about 3%, every rand of government spending got us 1.60 rand in GDP

“Now, however, at such elevated real interest rates, every additional rand gets us less than a rand of GDP. It may even subtract GDP, leaving us poorer and more indebted than before.”

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