As finance Minister Enoch Godongwana prepares for his Medium-Term Budget Policy Statement (MTBPS) in Parliament on November 1, 2023, one of his major considerations will be reining in spiralling public debt.
The MTBPS traditionally sets government policy goals and priorities, forecasts macroeconomy trajectory, and projects the fiscal framework over the next three years by outlining spending and revenue estimates, among others.
That timeline is crucial both in the context of South African sovereign indebtedness and the fact that global debt is returning to its pre-pandemic rising trend, according to the latest blog by Vitor Gaspar, director of the Fiscal Affairs Department of the International Monetary Fund (IMF).
“Global debt, which remained significantly higher than its pre-pandemic level in 2022, may return to its long-term rising trend. Policymakers will need to be unwavering over the next few years in their commitment to preserving debt sustainability,” advised the fund.
The IMF in its Article IV Consultation report in June this year had already urged Godongwana in its peculiar fund-speak to pursue “predominantly expenditure-based fiscal consolidation measures of 3% of GDP over the medium-term to put the public debt on a firmly declining path,” and to improve the institutional fiscal framework to support growth-friendly fiscal adjustment, create fiscal space, and to improve risk management – in other words to boost tax revenues through more efficient collection and a wider tax base especially increasing VAT by a suggested 2%.
The IMF also strongly advised the government to rein in the debt of failing SOEs especially Eskom and Transnet which are a heavy burden on Treasury coffers.
In response Godongwana perhaps overtly optimistically maintained that “the fiscal deficit has narrowed, both as a percentage of GDP and in nominal terms, but risks remain elevated and some have begun to materialise.
On the financing front, the government will continue to maintain an active debt management strategy to manage borrowing costs and maturity risks, and explore further concessional borrowing, including through climate finance.
The Eskom debt relief programme and unbundling process provides a clear path for the financial future of the utility while reducing contingent liabilities.”
Godongwana can take some consolation that he is not the only minister of finance preoccupied with a phenomenon which is sweeping the world and has now re-assumed pre-pandemic debt epidemic proportions. In percentage terms, according to the latest update of the IMF’s Global Debt Database last week, the global debt burden retreated for the second year in a row, even though it remains above its already-high pre-pandemic level.
The total debt stood at 238 percent of global GDP in 2022, 9 percentage points higher than in 2019. In US dollar terms, debt amounted to $235 trillion in 2022, or $200 billion (roughly R3.8 trillion) above its level in 2021.
“Despite the economic growth rebound from 2020 and much higher-than-expected inflation, public debt remained stubbornly high. Fiscal deficits kept public debt levels elevated, as many governments spent more to boost growth and respond to food and energy price spikes even as they ended pandemic-related fiscal support,” noted the Fund.
As a result, public debt declined by just 8 percentage points of GDP over the last two years, offsetting only about half of the pandemic-related increase.
Private debt, which includes household and non-financial corporate debt, declined at a faster clip, dropping 12 percentage points of GDP.
Even then, the decline was not enough to erase the pandemic surge.
Global debt-to-GDP ratios had risen for decades well before the onset of the pandemic. Global public debt tripled since the mid-1970s to reach 92 percent of GDP (or just above $91 trillion) by end-2022.
Private debt also tripled to 146 percent of GDP (or close to $144 trillion), but over a longer time span between 1960 and 2022.
Godongwana is a consummate pragmatist. If he had his way, he would be more aggressive in his public expenditure cuts and in containing a bloated public sector wage bill, but he is bound by the factional ideologues within the ANC coalition which includes the SACP and Cosatu, who have already warned against wholesale spending cuts in the MTBPS, especially in social grants, public sector wages and other safety nets.
There is also pressure on President Cyril Ramaphosa to extend the R350 monthly social welfare grant introduced in the wake of the pandemic in 2020.
South Africa’s economy, he maintains, is facing significant risks. “We are navigating this difficult environment with policies that support faster growth and addressing fiscal risks through ensuring a stable macroeconomic framework, implementing growth-enhancing reforms and strengthening the capacity of the state to deliver quality public services, invest in infrastructure and fight crime and corruption,” said the Treasury in a recent statement.
The problem is that there is a mismatch between the rhetoric of aspirations with the pace and extent of structural reforms and their implementation. The elephant in the room is of course the looming general election in 2024.
At the News24 2023 On The Record Summit earlier in September, the finance minister nervously quipped: “During an election, nobody wants to increase taxes, but everybody wants to increase expenditure to buy votes. You can’t have both.”
The reality is a stark reminder that debt like money does not grow on ideological trees.
The latest Bloomberg Emerging Markets Sovereign TR Index puts South Africa’s Sovereign Debt Vulnerability Ranking at 12th out of 60 country’s – the lower the rank the higher the risk.
South African sovereign debt to GDP ratio for 2023 is projected at 72.3% and the debt service interest expense is projected at 5.1% of GDP.
Debt stabilisation is also beholden to narrower sovereign debt spreads – the yields on South African government bonds, which according to Bloomberg stands at 3.2%.
This is further exacerbated by the market behaviour of foreign investors in South African sovereign debt, and whether local investors have the capacity or willingness to absorb such debt in the potential numbers should they be asked to fill the gap.
The IMF forecasts South Africa’s debt servicing interest bill to increase from 19% of revenue this fiscal year to 27% of revenue by FY28/29—about twice this year’s budget allocation for health. Despite the declining fiscal deficit, public debt, projects the fund, is set to increase from 71.4% in FY22/23 to 73.6% of GDP in FY25/26 due to the government’s debt relief to Eskom, the weakening minerals and mining revenues, wage bill pressures, and rising debt service.
Increasing tax revenues by 30% and the Tax-to-GDP ratio by 5%, as suggested by the fund is going to be difficult to adopt in an election year.
No wonder for the government any gains no matter how small in the overall scheme of the economy is good news. These include a 0.6% expansion in GDP in Q2 2023, a R5 billion investment pledge by auto component manufacturers, job creation at the Rainbow Chickens facility in Hammarsdale and an investment by Stellantis to develop a greenfield manufacturing facility.
Parker is an economist and writer based in London