SA unlikely to fall into Greece-type debt trap

2010-02-20 10:15

ALTHOUGH South Africa’s state debt is expected to climb rapidly

over the next three years the chairperson of Parliament’s finance portfolio

committee, Thaba Mufamadi, is confident the country will not fall into a debt

trap similar to the one that Greece is in.

Government debt is forecast to balloon to R1.3?trillion (about 40%

of GDP) in 2012 from R690?billion (28% of GDP) this year. However, Mufamadi is

not overly concerned about this sharp spike in state loan stock.

“South Africa’s debt is still within containable levels. I don’t

think we will go beyond 40% unless the world economy collapses,” he says.

“We have a track record in reducing debt. I have full confidence in

our ability to manage our debt levels.”

He says the government expects the economy to grow by 2.3% this

year, with growth climbing to 3.6% in 2012.

“As the economy grows and the state generates more tax revenue

there will be less need to borrow from the markets,” Mufamadi says.

Due to weak tax revenue collections the government expects to

borrow R175?billion from the capital markets in 2010/11. In the fiscal year

2008/09 it only borrowed R23.3?billion, thanks to a spending boom that brought

in unprecedented amounts of revenue to the fiscus. But the global economic

crisis has changed all of that. South Africa has to rely on an expansionary

budget which focuses on higher spending and tax cuts to encourage economic

growth. This has led to the budget deficit widening to 7.3% of GDP.

Government has also had to embark on an R846?billion infrastructure

­investment programme despite a slump in tax revenues. This programme and a

shortfall in its budget are financed through borrowing. As the state debt

balloons so will the repayment expenses.

“Government net debt is expected to increase from R690?billion in

2009/10 to R1.3?trillion in 2012/13 and as a result debt service costs are

budgeted to increase from R57.6 billion to R104 billion over this period,”

predicts the 2010 Budget Review.

“National government net debt is projected to peak at about 44% of

GDP in 2015/16, before stabilising,” it says.

However, Jac Laubscher, the chief economist at financial services

group Sanlam, expects a far higher number than 44% because the government

projections do not take into account the possibility that interest rates could

rise, pushing up debt-service costs.

“My own view is that state debt will be close to 50% of the GDP by

2015,” says Laubscher.

He says a debt of less than 50% of the GDP is manageable but

anything beyond that should raise red flags.

“If we were to get above 60% to the GDP I would be worried. But we

are far away from that,” adds Laubscher.

He says if state debt were to grow uncontrollably the budget

deficit would widen further, forcing the government to cut spending or to

increase taxes.

Laubscher also expresses confidence in South Africa’s ability to

keep its debt at sustainable levels, saying it would take gigantic fiscal

indiscipline to slip into the debt trap that European Union (EU) member, Greece,

presently finds itself in.

“We will have to be irresponsible before we become another Greece.

We don’t have a big brother like the EU which can bail us out,” he says.

Greece is currently battling a €300?billion (about R3?trillion) debt,

estimated to be about 120% of its GDP. It has no choice but to cut its budget

deficit of 12.7% to GDP through raising taxes or reducing spending.

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