The Institute of International Finances has warned that South Africa’s debt could reach as high as 95 percent of gross domestic product (GDP) in 2024. File Photo: IOL

JOHANNESBURG – The Institute of International Finances (IIF) has warned that South Africa’s debt could reach as high as 95 percent of gross domestic product (GDP) in 2024 as a result of state-owned enterprises (SOEs) drainage on public finances.

The IIF said low growth, high interest payments, weak tax administration, and a decade of mismanagement were the main reason for revenue under-performance of the economy. 

It said SOEs were crowding out investment and draining on public finances. The IIF said taking on Eskom’s guaranteed debt would increase the stock of sovereign debt by six percentage points. Eskom’s R450 billion debt has been described by the rating agencies as the single biggest risk to the country’s fiscal position. 

“While successful design and implementation of reforms will take time, agreeing on the restructuring of Eskom and the national growth plan will be crucial first steps towards putting debt sustainability back on track,” the report said. 

In February the government said the country’s net loan debt was expected to reach 49.9 percent of GDP to reach R2.52 trillion in the 2018/19 financial year, increasing by 55.5 percent to R3.47 trillion by 2021/22. 

South Africa is facing a protracted period of stagnant growth as the economy is forecast to grow about 0.6 percent this year. In July, the IIF said that weak growth would weigh on tax revenues, leading to a sizeable revenue shortfall, while the front-loading of financial support to Eskom would cause spending overruns. 

The IIF said one of its baseline scenarios assumed that real GDP would grow by an average of 1.5 percent in 2019/24, debt as a share of GDP would increase by more than 13 percentage points, from 57 percent in 2018 to 70 percent in 2024. It said the 95 percent estimate was the worst of four outlooks. 

However, the IIF said mitigating factors for the economy were independence of the SA Reserve Bank, limited foreign exchange debt, and longer maturity of sovereign debt relative to emerging market peers. 

Finance Minister Tito Mboweni will outline more details of the government’s plan to revive growth and deal with SOEs, including the splitting of Eskom into three units. Moody’s is also scheduled to announce the country’s latest sovereign credit rating soon after the Medium-Term Budget. 

The IIF said South Africa’s medium-term fiscal issues were a result of structural and social impediments to growth. It said if these were to be addressed, debt could revert to below 50 percent of GDP in the coming years. “We believe that South Africa may be able to hold on to its investment-grade rating with Moody’s, while being put on negative watch,” the IIF said.