This comes as finance minister, Enoch Godongwana, will deliver his fourth Budget Speech of his term next week. Picture: Phando Jikelo/Independent Newspapers
Deloitte Africa has cautioned that the National Treasury needs to build a more sustainable debt trajectory in a bid to lower South Africa’s risk premium as the country’s public finances continue to deteriorate under the burden of
This comes as finance minister, Enoch Godongwana, will deliver his fourth Budget Speech of his term next week after indicating that economic reforms were starting to yield results, noting improvements in electricity supply, stabilised logistics, and reduced business costs in his speech a year ago.
The budget is expected to focus on tax reforms, sustainable development, job creation, healthcare funding, infrastructure investments, and support for agriculture.
Despite these positive strides, it is clear that South Africans will have to navigate financial pressures for a while longer.
Hannah Marais, chief economist at Deloitte Africa, on Monday agreed with the International Monetary Fund (IMF) that the National Treasury needed to start thinking about setting a ceiling to the government debt.
“Ultimately, our attempt to consolidate our debt and build a more sustainable debt trajectory challenge at the moment, there's not much credibility around that. There's no debt ceiling. There's no expenditure rule,” Marais said.
“Yes, we sort of want to achieve a primary budget surplus, but there's no credibility around that. The suggestion from the IMF is to target 70%, target 60% of gross domestic product (GDP) and work towards that. Because having prudent debt levels beyond creating credibility can actually lower your risk premium. It can lower your debt service costs. It can help crowd in private investment again, et cetera.”
Last month, weighed proposals for South Africa’s government to adopt a “debt-ceiling” strategy akin to that of the US government, aiming to address the nation’s rapidly escalating and unsustainable debt burden.
This suggestion unfolds as the IMF emphasises the need for the South African government to embrace more ambitious fiscal consolidation efforts in a bid to mitigate the country’s rising debt levels and fortify its fiscal buffers.
Projections from the National Treasury reveal that South Africa's government debt, currently standing at R5.2 trillion, is expected to exceed R6.05trln, constituting 75.5% of GDP by the 2025/26 financial year.
Alarmingly, debt-service costs are fast becoming the predominant component of government expenditure, escalating more rapidly than the pace of economic growth.
In the current financial year, the government will allocate approximately R388.9 billion to debt-service costs, translating to a staggering 22 cents of every rand raised in revenue directed to servicing this debt.
As challenges loom large in the global landscape, with risks stemming from escalating geopolitical tensions and slowed growth among key trading partners, the IMF reiterated its forecast that South Africa’s real GDP growth would accelerate to 1.5% by 2025, propelled by rejuvenated private consumption and investment, supported by improvements in electricity generation.
Marais added that the debt ceiling would be critical for public finances on the back of slow growth trajectory.
“I think on the flip side, because we're still in obviously a low [growth trajectory compared to] in the heyday years of 5% growth, something which we used to have a decade plus ago before the global financial crisis, the important thing of having that credibility as well under debt ceiling or an expenditure rule, for example, is when growth does pick up, how do you act and how does it impact your debt to GDP ratio,” she said.
“So I think there are consultations on that as far as I am concerned. But I mean, if you look at the literature, the IMF sees, you know, debt to GDP at prudent levels of 60%. We are at 70.5% as per the latest figures when it's stabilizing but I mean the challenge has been the credibility around that.”
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