The IMF Deputy Managing Director, Tao Zhang, recently noted the challenges that 40 percent of low-income countries face high risk of debt distress or are unable to service their debt fully. Photo: Reuters
The IMF Deputy Managing Director, Tao Zhang, recently noted the challenges that 40 percent of low-income countries face high risk of debt distress or are unable to service their debt fully. Photo: Reuters

WEF 2020: Will Cyril Ramaphosa and Tito Mboweni rescue the country from the long-term debt burden?

By Miyelani Mkhabela Time of article published Jan 13, 2020

Share this article:

JOHANNESBURG – The World Economic Forum (WEF) on economic themes for Davos 2020 ask a question to all nations , as to “how to remove the long-term debt burden and keep the economy working at a pace that allows higher inclusion” reacting to the reports of World Bank and International Monetary Fund (IMF) highlighting that while economic growth and record-low interest rates have made it easy to service existing government debt, it’s also created a situation where government debt has grown in to more than $63 trillion in absolute terms 2009 and In its latest update, the IMF said the global debt has reached an all-time high of $184 trillion. 

The updated amount, in nominal terms, is the equivalent of 225 per cent of the world GDP in 2017. On average, the world's debt now exceeds USD 86,000 per person — more than 2½ times the average income per-capita. 

The global economic tide can change fast, and in the event of a recession or rapidly rising interest rates, debt levels could come back into the spotlight very quickly and economies like South Africa needs to ponder and synthesize on this global national debt trends protected to affect the Japanese, Brazilian, United States, Egypt and Greece continue to be in the middle of such a dark sea. 

Karl Marx looks at the national debt as a golden chain by which the bourgeoisie controls the state and I believe such changed as now the nations that were in the line to be bourgeoisie are deeply in debts that has challenged the Davos Society to make national debt one of the themes for the World Economic Forum 2020. The debt-to-GDP ratio is usually expressed as a percentage and is used to indicate whether or not a country is able to pay back its debts. 

If the ratio indicates that a nation is unable to pay its government debts, there is a risk of default, which could wreak havoc on the markets.McKinsey's report titled “debt and (not much) deleveraging”, which raises the point that seven years after the bursting of the global credit bubble, debt continues to grow, which is in line with the International Monetary Fund (IMF) reports from 2007 till 2017. 

The report emphasizes that these trends poses new risks to financial stability and may undermine global economic growth. The report highlights that the current solutions for sparking growth or cutting fiscal deficits alone will not be sufficient, New approaches are needed to start deleveraging and to manage and monitor debt and that will includes innovations in mortgages and other debt contracts to better share risk; clearer rules for restructuring debt; eliminating tax incentives for debt; and using macroprudential measures to dampen credit booms

Citing Trading Economics, South Africa recorded a government debt equivalent to 55.80 percent of the country's gross domestic product (GDP) in 2018. Government Debt to GDP in South Africa averaged 40.31 percent from 2000 until 2018, reaching an all time high of 55.80 percent in 2018 and a record low of 27.80 percent in 2008. 

The South African national debt is a clear sign that leadership can create a crisis and the leadership that will take-over after a decade or so, there leadership capabilities will be to solve the crisis created by their predecessors. This further highlights that even though leadership is inspiration, problem solving and leading a clear national vision, we still observe leaders creating problems in different nations, including many African economies. 

South Africa recorded a Government Budget deficit equal to 4.40 percent of the country's GDP in 2018. The government budget in South Africa averaged -3.34 percent of GDP from 1989 until 2018, reaching an all time high of 1 percent of GDP in 2007 and a record low of -7.40 percent of GDP in 1992.

The IMF Deputy Managing Director, Tao Zhang, recently noted the challenges that 40 percent of low-income countries face high risk of debt distress or are unable to service their debt fully—this is up from 21 percent just five years ago. On top of this, several developing countries are also falling behind in terms of per capita income, induced by such factors as fragility and conflict which include vulnerable countries mainly in Africa. 

Most nations are experiencing Low tax revenue and weak international support based on their global competitiveness and Doing Business Frontier attractiveness. A key problem is that many of these countries are not able to raise enough public revenue, a scenario for the South African economy. There are many reasons for this as narrow tax bases, continued over reliance on extractive industries, and weak tax administration. But tax evasion is also part of the problem. 

The low tax take in low income developing countries—where the median tax revenue is just 13.3 percent of GDP—can be traced in part to informality and tax evasion. While other African economies are also facing poor management in their revenue services agencies that lead to systematic corruption, specifically illicit financial flows which the former president Thabo Mbeki, African union report highlighted the problem 

Debt to GDP Ratio by Country 2020 portrays that Japan and Greece are the most indebted countries in the world.Japan, with its population of 127,185,332, has the highest national debt in the world at 234.18% of its GDP, followed by Greece at 181.78%. Japan's national debt currently sits at ¥1,028 trillion ($9.087 trillion USD). 

China’s national debt is currently 54.44% of its GDP, a significant increase from 2014 when the national debt was at 41.54% of China’s GDP. China’s national debt is currently over ¥38 trillion (over $5 trillion USD). An International Monetary Fund report from 2015 stated that China’s debt is relatively low, and many economists have dismissed worries over the size of the debt both in its overall size and relative to China’s GDP. China currently has the world’s largest economy and the largest population of 1 415 045 928 people. The Chinese national debt is manageable at 54.44% of its GDP and their smart industries and smart factories makes them resilient in globalization 4.0. 

Russia’s debt ratio is one of the lowest in the world at 19.48% of its GDP. Russia is the ninth least indebted country in the world. Russia’s debt is currently at a total of over $216 billion. Russia’s position is investment outflows to emerging markets and it continue to make them a nation with the greatest investment strategy in the global economy. 

Germany’s debt ratio is manageable currently at 59.81% of its GDP. Germany’s total debt is at approximately 2.291 trillion € ($2.527 trillion USD). Germany is Europe’s largest economy and one of the world’s leaders in industrial revolution and manufacturing key components that’s are exported to the global markets. 

Generally, Government debt as a percent of GDP is used by investors to measure a country ability to make future payments on its debt, thus affecting the country borrowing costs and government bond yields. 

Modernizing international rules, national policies and behind-the-border trade facilitation strategies with the aim of strengthening trade and investment flows is expected to help developed and emerging market economies to be attractive and not respond to all investments through foreign debt but blending it with foreign direct investment . 

Foreign Direct Investment as a Key Driver for Trade, Growth and Prosperity. Foreign direct investment (FDI) is a powerful instrument for growth and development, and is key to enhancing prosperity worldwide and it assisted in boosting the economy during 2002 till 2008. National competitiveness and an attractive Doing Business in South Africa can  encourage more FDI inflows from developed countries seeking to expand their markets in the African continent. 

These long-term investments relationship and lasting interest in and reasonable stake or equity control by a resident entity in one economy has developmental impacts in exchange of knowledge with technological advances that can boost the South African economy with restoring the manufacturing sector and telecommunications sector to create jobs to the struggling economy. 

FDI flows have three components which are equity capital, reinvested earnings, and other capital (including short- and long-term intra-company loans as well as trade credits).

The fDi Report 2019 has depicted greenfield foreign direct investment (FDI) to have been rebounded globally to growth in 2018.South Africa has large number of projects in climate change and Circular Economy related sectors that are integrated to almost all sectors in manufacturing chemicals, textiles, food, plastics,  electronics and electrical and lastly the packaging industry that can see the country realign its economy simply. 

Key FDI trends spotted in BRICS economies included China  replaces the US as the highest ranked country for FDI by capital investment, Capital investment into India grew by 120% to $54.3bn and Brazil had a resurgent year for FDI, increasing by 77%. The fDi Report 2019 reveals that greenfield capital investment increased by 42% to $662.6bn, while the number of FDI projects increasing by 7% alongside a 25% increase in job creation. 

Reflections on the genesis of the capitalist acknowledges that, the modern system of taxation was the necessary complement of the system of national loans and the loans enable the government to meet extraordinary expenses, without the tax-payers feeling it immediately, but they necessitate, as a consequence, increased taxes. As the national debt finds its support in the public revenue, which must cover the yearly payments for interest , On the other hand, the raising of taxation caused by the accumulation of debts contracted one after another, compels the government always to have recourse to new loans for new extraordinary expenses. 

South Africa’s gross loan debt stood at R2,2 trillion in 2016/17, according to the National Treasury. This translates to about R40 000 per person living in the country. Servicing this level of debt can be expensive with Interest payments accounted for 9,2% (or R146 billion) of general government expenditure (R1,58 trillion) in 2016/17. In other words, for every R100 of total spending, R9,20 was used to pay interest on debt.

South Africa’s subdued economic growth could be reignited if the pace of structural reform implementation accelerates. Robust actions are needed to reduce the fiscal deficit and reverse the increase in public debt. The government has a renewed opportunity to press ahead with policies to further strengthen governance, encourage competition, increase labour market flexibility, and, more generally, reduce the cost of doing business.

Post elections , there was optimism about economic prospects as the new government was expected to formulates its policy agenda with clear understanding of the recommendations that the growth outlook will depend critically on the pace of implementation of reforms that address long-standing structural constraints. If reform implementation accelerates sufficiently to lift business confidence and jump-start private investment, growth would be reignited, contrary to that, if reforms are delayed, investment would fail to pick up, economic growth would remain weak in the medium term.

The fiscal deficit is set to worsen as weak growth constrains revenue, current expenditure remains rigid, and public enterprises require additional support. As a result, debt pressures are likely to further increase in the near term. The South African Broadcasting Corporation, SA Post Office, Denel, South African Airways (which is placed into business rescue practitioner) and the loadshedding crisis at Eskom is taking the South African economy towards to a no investment grade that will lead the economy to experience more investment exit from March 2020. 

In an article published 2014 after elections, my recommendations then suggested that Tito Mboweni be appointed as a finance minister because I can see the economy stepping into the sea with closed eyes and my wish that would have saved the South African economy from this mess, were not received at all. South Africa now has lessons on how power can do badly to a nation when it is not used with reflection and mindfulness. 

The January 8th statement has not showed focus in implementing reforms, that will lead to investors community to project the 2020 State Of The Nations Address and The Budget Speech to have a mild presentation, which will lead to a Moody’s rating agency downgrade. The country will struggle to turnaround and will not attract investments from institutional investors. 

Downgraded to a no investment grading will balloon the debt and its interest, we will loose subscription to global bonds and the country will be removed from attractive economies during the period of downgrade, which might take us to the last month 18 month of the next elections and we will struggle in things that need willingness from political leadership currently. 

Miyelani Mkhabela is an Economic Strategist and Director at Antswisa Transaction Advisory. Contactable at: [email protected] and twitter :@miyelani_hei

BUSINESS REPORT

Share this article:

Related Articles