It’s an election year, so our public finances will only get worse
The magnitude of the disarray in South Africa’s public finances is being understated in official government reports. Too many private sector economists are also giving too rosy analyses of the country’s dire economic situation.
This means South Africa cannot effectively deal with its public finance crisis — and if the public finances plunge into a systemic crisis, it will come as “unexpected”.
Given it is an election year, the country’s public finances are likely to worsen even more dramatically as ANC officials expand the patronage, pork-barrelling and populist policies to secure the party’s re-election — and burden the post-election government with heavy financial liabilities.
The public finances are undermined by ballooning public debt and fiscal deficit levels, combined with toxic policies and state failure which in turn worsen, and will continue to worsen, public finances.
This week, the National Treasury released data which showed that the budget deficit widened to 6% in December — reflecting just one indicator of the crisis. Finance minister Enoch Godongwana in his medium-term budget policy statement in November said the Treasury projected a budget deficit of 4.9% of GDP.
The Treasury in its previous estimates had suggested 4%. The increase was caused by a bigger public sector wage bill, higher debt servicing costs and reduced revenue. It is very likely that the budget deficit may widen sharply on the back of vote-seeking policies and public spending.
South Africa’s public debt is expected to be R6trillion by 2026. Gross debt is now projected by the Treasury to reach 77.7% of GDP in 2025/26. In last February’s budget estimate, it was estimated to be 73.6% of GDP for that period. In 2009, debt stood at 23% of GDP. If South Africa continues with its populist policies, incompetence and corruption after the election, that 77.7% is likely to increase dramatically.
The government will seek new loans to plug deficits in the budget. Traditionally, a gross debt figure of 60% of GDP is seen as “sustainable” in growing developing countries. However, such debt is sustainable only if there are public assets to show for it — critical infrastructure, new export industries and sustained high investment and growth. But large parts of South Africa’s infrastructure have collapsed. Toxic policies, corruption, incompetence and state failure have driven out investors, capital and skills and closed down private businesses and social enterprises.
The Treasury is considering withdrawing half of the R497bn in contingent reserves held by the Reserve Bank — the Gold and Foreign Exchange Contingency Reserve Account — to reduce debt or to fund public sector wages.
This would risk the weakening of the country’s buffer against future shocks. The dire public finances, state failure and economic decline, combined with poor and nonsensical populist and ideological policies, corruption and incompetence, make South Africa’s economy vulnerable to external shocks, which means the country needs to have adequate buffers.
The JSE has lost 22% in US dollar terms since 2018. The Nasdaq-100 gained 147% and the S&P 500 75% in the same time. Foreign investors have withdrawn about R1-trillion from South Africa’s bond and equity markets over the past decade — directly because of poor governance, credit downgrades, the widening fiscal deficit, state failure and rising corruption. In 2023, foreign investors sold R135bn worth of domestic shares as South Africa’s power, infrastructure, lawlessness, state failure, corruption and policy populism crises continue.
Government debt is increasingly held by local banks, insurers, pension funds and investment funds — as foreign investors mass-exit South Africa. The Reserve Bank has warned in its Financial Stability Review that the stability of local financial institutions is at risk because of increasing exposure to government debt. Since 2018, the rand has weakened significantly against the US dollar — from R11.55 in February 2018 to R18.63 in January 2024, for the same reasons: poor governance, nonsensical policies, state failure and corruption.
This week a report by Transparency International showed that corruption in South Africa is now worse than it has ever been since the end of apartheid. It classified South Africa as a “flawed democracy”.
The global economy is on track for the worst half-decade of growth in 30 years because of geopolitical tensions, higher borrowing costs and China’s slowdown, the World Bank said recently. This means South Africa will have very little help internationally to shore up its self-inflicted failing economy.
If the country continues after the election along the same path, economic growth, job creation and poverty reduction will be a distant dream.