Hourglass Economics: SA debt crisis (2024)
By Siyabonga Hadebe
It is a foggy morning in Johannesburg and the date is June 7, 2024 …
PRETORIA – South Africa’s financial problems continue to mount as its third government in a less than nine months tries to the force the International Monetary Fund (IMF) and a litany of lenders including the New Development Bank (BRICS Bank), African Development Bank (AfDB) and other local lenders. SA reportedly owes international lenders undisclosed sums following numerous loans and other financial obligations incurred in the last few years.
However, IMF managing director Kristalina Georgieva wants to hear none of South Africa’s bickering and insists that the troubled African country must adhere to a list of austerity measures, which include the selling of the entire portfolio of state-owned enterprises (SOEs), restructuring of public finances, etc. Georgieva has sent technical advisers to Pretoria with a view of restructuring the debt, but their efforts face opposition by the socialist government.
Recently elected firebrand president Julius Malema and his finance minister Sibusiso Mkhatshwa say that the country cannot afford any further austerities and now demand debt forgiveness, failing which, they suggest that SA will follow in the footsteps of Ghana, Zambia and Argentina who last week turned their backs on the IMF, and the international financial system which they term neo-colonialist and oppressive. The three countries have informed the Washington-based finance body that they are in no position to pay and therefore declared a unilateral decision to quit.
In a joint statement, the three countries stated in clear terms terms that they were not going to payback a combined $450 billion debt. A large portion of this amount was borrowed in 2020 to help the countries deal with the coronavirus pandemic. In a chaotic global economy, the developing countries reject settling any debt and also favour collapsing the existing global financial architecture. The IMF uses trade barricades and other sanctions against countries who revolt the international system.
SA is the latest to join the countries with financial difficulties in a world that is barely recognizable after the ravage created by the IMF loans and the coronavirus pandemic in 2020. The country could face debilitating sanctions and exclusion from any future lending and many companies want to pull out after the government imposed strict foreign currency controls to curb a possible depression.
The IMF is putting pressure on SA to honour its debt repayment obligations amounting to R101 billion, or $7.3 billion due next month.
How did SA and the IMF get into this mess in the first place?
The seeds were sown back in 1996 when SA adopted a string of financial reforms which included floating the rand, and implementation of the Growth, Employment, and Redistribution (GEAR) – that focused on privatization and the removal of exchange controls. In the years following this, Pretoria ran a budget surplus and had a growth averaging 4.5 percent until 2004 but the problem of unemployment simply refused to go away. Economists termed this a jobless growth.
Even then, there were warnings that the apartheid-based economy needed restructuring to eliminate the threat of unemployment and other socio-economic ills in a population that was already projected to grow faster than its GDP. Researchers proposed public policy that will improve education, healthcare, and of course the economy. Among many suggestions, experts proposed an industrial policy that would focus on labour intensive sectors and beneficiation of minerals.
Macroeconomic policy was singled out as probably the most useful tool that could be used to destroy the apartheid legacy but both the finance ministry and the central bank chose the conservative route. Everyone including the World Bank, IMF and rating agencies applauded the growing financial sector and “economic freedoms” that were guaranteed citizens and non-citizens alike, which saw a rapid increase in private education, security, hospitals, etc.
All went well for the first several years. SA even hosted the 2010 FIFA World Cup which was accompanied by a huge spending on infrastructure like roads and stadiums. But there was absolutely no improvement on the electricity generation and municipal infrastructure such as water, roads, etc. The gap between highly developed cities and mainly black residential areas continued to widen and these divisions left a bitter taste for anyone concerned with social justice. A storm was brewing but the authorities chose to turn a blind eye.
It was only a matter of few years that that the country started to experience rolling blackouts and two large coal-fired power stations were commissioned without much success. Government spending on welfare started to increase at a faster pace. The political governance reached an all time low. The economy declined: unemployment reached 30 percent, recession became normal, the currency floundered and corruption in both private and public sectors shot up.
While the country was still leaking its wounds the coronavirus attacked in 2020.
The financial turmoil and political instability
South Africa had recorded a government debt equivalent to 62.2 percent of the country’s GDP in 2019. Moody’s then estimated that the debt burden would reach 91 percent of GDP by fiscal 2024, inclusive of the guarantees to state-owned enterprises (SOEs) from 69 percent at the end of the 2019 fiscal year. The Budget deficit for the 2020/21 financial year was 15.7 percent of GDP as the economy contracted by over 12 percent in the face of the Covid-19 pandemic.
There was a huge decline in investment, corruption increased, unemployment reached an astronomical 52 percent and debt servicing costs shot to the roof. All that could go wrong converged in one place. Nonetheless, in an austerity budget in June 2020 Finance Minister Tito Mboweni estimated, “Government will narrow the deficit and stabilise debt at 87.4 percent of GDP in 2023/24.” At the same time, he announced that cabinet had also adopted a target of a primary surplus by 2023/24.
Unfortunately, none of all of this happened as the down slope in the economy got steeper and steeper. It was a matter of time before serious problems set in.
Like all the other countries, South Africa announced major steps to deal with the fallout created by the coronavirus while maintaining a strict lockdown regime which decimated whatever little that remained of the economy. With falling income and increasing problems, government of President Cyril Ramaphosa went out to the international markets to borrow money against warnings from economists and other influential members of the public.
This whole scenario took place against a difficult fiscal background. Nevertheless, SA approached lenders and got itself a bucketload of loans whose terms were never made public. These included R70 billion from the IMF, R5 billion from AfDB, and R16.7 billion from the BRICS Bank which was later increased by R24.9 billion.
Old and new loans meant that SA was swimming in even more debt than before. The budget deficit reached 27.4 percent of their GDP in March 2024. This led to a panic of default, and widened the 10-year bond yield spread. From 2022 to 2023, 10-year bond rates surpassed 35 percent. Rates fell again in 2023 after private bondholders agreed to a vast debt restructuring that exchanged R89 billion in bonds for 75 percent less debt.
To avoid default, the IMF loaned SA enough (R200 billion) to continue making payments.
It was the biggest financial rescue of a bankrupt country in history after Greece. As of January 2024, SA has only repaid R89 billion. It has scheduled debt payments beyond 2080. In return for the loan, the IMF required SA to expedite austerity measures. These reforms were intended to strengthen the South African government and financial structures. They did that, but they also mired SA in a recession that didn’t end until January 2023.
This prompted Ramaphosa to resign and was quickly succeed by Ace Magashule, his colleague in the ANC. Magashule occupied the hot seat for six months, which marked the end of the ANC’s 28 year rule. Magashule was succeeded by John Steenhuisen of the DA following a hotly contested election in July 2023.
Under the DA, the economy disintegrated further which saw it face unprecedented riots in its previous strongholds such as Western Cape. After just a few months after he was elected on a promise to overturn austerity, South African president Steenhuisen announced in November 2022 that he was stepping down to pave the way for snap elections, which took place in the following month. Radical Malema got a resounding mandate from the voters to take the country out of the financial quagmire.
Since taking power in January 2023, Malema has played hardball with the creditors, and this has obviously upset the iron-fisted Georgieva. Malema leads the charge against the “imperialist” IMF on behalf of the Common Monetary Area (CMA, or the Rand Union), which links the economies of South Africa, Namibia, Lesotho and Eswatini.
South Africa has the largest economy in the region and many countries depend on it from goods and investments. Its trading partners such as Zimbabwe, Mozambique, Angola and others face their own financial strain following the IMF reckless lending during COVID-19 pandemic.
It is believed that all African countries are up in arms as the entire continent is confronted with a deepened economic crisis, worse than the damaged created by the structural adjustment programs (SAPs) in the 1980s.
SA versus money-lenders
Last week in parliament, Malema presented a new set of proposals to fend off the harsh austerities in the midst of country-wide riots. He wants SA to leave the IMF and not to pay back the debt in a spirit of creating a new African political order, which he champions. He announced at a rally in Mbombela that no public servant will be fired, no single SOE will be given to the IMF and SA was ready to defy imperialists. He then asked South Africans to support this package of political reforms.
A new referendum on this matter is expected is expected in less than in five days where voters will decide to back or reject the Malema administration’s plan to revolt the international financial system. Russia and China staged successful revolts after their economies collapsed. They have made a call for other states to follow suit but G-7 countries, Western Europe, Australia and the Brettonwoods are fighting back.
The IMF has engineered a take over of several countries in Latin America, Eastern Europe, Central Asia, Oceania and the Asian subcontinent. Georgieva has warned of the fate of other heavily indebted African members. “We are watching the end of the political career of Julius Malema,” Yamkela Spengane, a senior fellow at the Hadebe Institute in Pretoria, said in a Bloomberg Radio interview. “Mr. Malema can continue his career on T-shirts for students, replacing Che Guevara.”
Georgieva says there will be no further debt negotiations with SA until the outcome of the referendum is known. G-7 finance ministers echoed that line following a conference call late on Wednesday. “It’s the legitimate right of the South Africans to do that whenever they want, on whatever question and with whatever recommendation the government wants to give,” Georgieva said in a speech to parliament. “But, to be clear, the other IMF member states have the same democratic legitimacy to duly take their position in response to the South African decision.”
Refusing to play ball with IMF didn’t turn out well for Argentine President Alberto Fernánde, whose premiership had survived innumerable court cases and a tawdry sex scandal. IMF first deputy managing director Geoffrey W.S. Okamoto urged Fernánde to resign in March 2023 to allow Argentina to fix its economy. A few days later he did just that.
Magashule and Steenhuisen learned a similar lesson the same year. When they both called bailout referenda, Georgieva insisted to them that the question focus on remaining in the IMF fold and paying the debt - as Okamoto recounted. The ensuing economic turmoil in SA, and within their own political parties, forced Magashule and Steenhuisen to resign.
“This is the historical truth,” Okamoto said.
Malema’s uncertain future spells a huge disaster for the already battered SA economy
Whether Malema can continue in office will depend largely on the outcome of the plebscite on Sunday. His left-wing EFF is urging voters to reject the programme of tax rises and spending cuts proposed by eurozone finance ministers. A “NO” vote could propel the country out of the IMF, an outcome that opinion polls show most South Africans want to avoid. Malema says that result would strengthen his leverage and yield a better bailout deal.
A win for the “YES” camp, backed by SA’s main opposition parties and the rest of the euro-area leaders, would constitute a public rebuke of Malema. When asked by an SABC interviewer if he would resign if he loses in the referendum, he said, “I’m not attached to the chair.” “I’m in this position because of the will of the people,” he said. “I will respect the will of the people.”
While Georgieva disputes that she seeks to interfere in other countries, her influence isn’t universally welcomed in other countries too. Marco Guedes, parliamentary leader of Peru’s anti-capitalist Left party, on Wednesday alleged that Georgieva is trying to foment regime change in Pretoria.
When asked in a Bloomberg Television interview Thursday if Georgieva is pushing for regime change, Finance Minister Sibusiso Mkhatshwa cited a stock phrase uttered by a fictional British politician.
“You may very well say that,” he said. “I couldn’t possibly comment.”
# Article is based on fictional scenario that could unfold in the event South Africa drowns in debt in the next few years.
Based in Pretoria, Siyabonga Hadebe is an independent commentator on socio-economics, politics and global matters.