While the Covid-19 pandemic has had a severe economic impact on just about every country in the world, there will inevitably be nations that will have to endure significantly more severe economic fallout in the years to come.
This is according to Azad Zangana, the senior European economist and strategist at Schroders, a multinational asset management company with headquarters in the UK. Zangana said increased borrowing throughout the pandemic and future years will inevitably lead to higher levels of debt as a share of GDP for nearly every country.
He was speaking about how country finances will suffer the worst long-term scarring after the pandemic. He said government debt levels had risen dramatically following the global health crisis and said most emerging markets will not be able to balance their books and recover from the fiscal impact of the pandemic in the medium-term.
“Canada, Japan, Australia and the US may manage to reduce borrowing back to below 2019 levels while emerging markets such as Brazil, South Africa and Chile are expected to be running a deficit smaller than in 2019 by 2025,” Zangana said.
“China and India are expected to still run deficits more than 8% of GDP. Only Chile, Thailand and Russia are forecast to have deficits below 2% of GDP, though Russia used to run a surplus before the pandemic,” he said, adding that South Africa is likely to struggle in coming years to return its finances to a sustainable path.
“Doing so will require tremendous restraint and discipline to enact significant fiscal austerity,” he said.
The coronavirus impact on global government borrowings has been enormous and similar to that of the 2008-2009 global financial crisis. According to the IMF, public debt in the G20 advanced economies is at levels last seen after the Second World War.
The IMF adds that global central banks were also quick to respond to the unfolding economic crisis caused by the pandemic.
Countries’ fiscal policies also stepped in a big way. Most governments introduced some form of household and business support and in addition, extra spending was also set aside to boost healthcare services, including vaccination programmes.
In South Africa, the main budget deficit and debt-service costs over the medium-term are projected to remain higher than pre-crisis levels.
Finance Minister Tito Mboweni said government will need to finance a gross borrowing requirement consisting of the budget deficit and maturing loans of R550 billion.
Mboweni added that debt-service costs will take up 21% of all revenue collected by government over the next three years.
He said South Africa’s fiscal situation remains serious and should not be conflated with the capacity of advanced economies.
“Government finances remain at substantial risk. This is due to the debt burden of more than 80% of GDP and the rising debt service costs, which now consume more than R1 out of every R5 raised in taxes,” he said.
He added because South Africa is not an advanced economy, the printing of its own currency would have severe consequences.
“Fiscal adventurism is not the solution to South Africa’s problems. Fiscal consolidation remains a key pillar of the National Treasury’s strategy. And we do not intend to deviate from it,” said the minister.
He added that the Treasury was aware the announcement of the latest Covid-19 relief measures came in the context of existing pressures on the fiscus, the largest pressure being the public sector wage bill.
Halting the upward trajectory of the public sector wage bill has been seen as a key stabilising factor to government debt.
Some analysts have said public sector employees enjoy significantly higher salaries than their counterparts in the private sector after several years of above-inflation salary increases without meaningful commensurate improvement in service delivery.
Andrew Duvenage, the managing director of NFB Wealth Management, said more than half of all trade unions representing public servants had accepted government’s offer of a 1.5% salary increase for an interim one-year wage deal and a monthly cash allowance.
“While the 1.5% increase was budgeted for, the cash allowance, which will cost R18 billion, has not been budgeted for and will require budget cuts in other areas. From a budgetary perspective, another challenge is the cost of social welfare given high – and increasing – unemployment,” said Duvenage.
“Post the recent civil unrest, President [Cyril] Ramaphosa announced the re-introduction of a R350 income grant. While there may be a very good case for implementing such a measure, where the money is going to come from without affecting fiscal consolidation plans remains unanswered,” he said.
But Mboweni said work was underway in the Treasury to finalise the areas of reprioritisation for the public wage bill.
“The reprioritisation will have to be done to accommodate the payment of this settlement, and the details thereof will be announced at the time of the Medium-Term Budget Policy Statement in October. We will continue our strategy of restoring the health of public finances.
“A package of measures is proposed which will be carefully financed to avoid further damage to the public finances. It should also be underpinned by greater urgency in the implementation of growth-enhancing reforms,” he said.
He added that government’s proposed package could be accommodated without an increase in debt.
“As such, our fiscal strategy remains on track. The implementation of these relief measures will not result in a change in the debt trajectory and the fiscal deficit will not exceed the level presented in the February budget,” the minister said.
“As a principle, government will avoid financing any measures from an increase in market lending, and we have different options in this regard.”