- Finance Minister Tito Mboweni has warned of an impending sovereign debt crisis if SA does not implement speedy reforms. But how likely are these reforms?
- Without significant policy changes there is little room to manoeuvre.
- The implications of ongoing factionalism are that the government no longer has sufficient gravitas and unified purpose to undertake the wide-spread reforms that could resurrect the economy in the long-run.
- Funding from global lenders may get us through the Covid-19 crisis and short-term financial challenges, but delayed structural reforms will mean the country will face the feared debt crisis.
In the recent supplementary budget, Finance Minister Mboweni warned that South Africa is facing the real risk of a sovereign debt crisis. He warned "We are still some way from that. But if we do not act now, we will shortly get there. The results are devastating."
A sovereign debt crisis—which means the country will be unable to pay or service its public debt—will force government to approach, cap in hand, the lender of last resort—the International Monetary Fund (IMF) for financial assistance far in excess of the $4.2 billion loan for which the government is in talks with the IMF for to tackle the Covid-19 health crisis.
Covid-19 may have hastened South Africa’s economic decimation, but the last decade of mismanagement and theft, and the prior decades of policy confusion set the country down the path to fiscal collapse long before the global pandemic.
The time has arrived to chart a different path, but can the current government achieve this?
Without significant policy changes there is little room to manoeuvre. Mboweni revealed that the consolidated budget deficit is forecast to hit almost 16% of GDP for the 2020/2021 financial year, a sharp increase from February’s estimate of 6.8% of GDP.
Growth is expected to contract 7.2%, the largest drop in nine decades, compared to the estimates in February’s budget of feeble growth at 0.9%. Gross tax revenue for the fiscal year was revised down from R1.43 trillion to R1.12 trillion. That means government expects to miss its tax target for this year by over R300 billion.
With declining tax revenues, the government’s debt levels are expected to soar to R4 trillion or 81.8% of GDP by the end of this fiscal year. This is compared to an estimate of 65.6% of GDP (R3.56-trillion) projected in the main budget in February.
Government wants to stabilise debt at 87.4% of GDP in 2023/24 and is aiming for a primary surplus that year. But as Moody’s recently noted, this is unlikely to happen based on the government’s historic inability to reduce government debt and budget deficits.
Deeper than Covid-19
Minister Mboweni set out two scenarios to explain the political ramifications of the country’s dire fiscal situation: a passive (‘the wide gate’) and an active (‘the narrow gate’). On the passive path, government debt-to-GDP will soar to 140% by 2028, all but guaranteeing a debt crisis.
On the active path, debt will stabilise at 87% and begin a slow decline. Unfortunately, the evidence suggests that most government ministers seem more inclined to take the passive gate as evidenced by the likelihood of increases for public sector workers, dreams of resurrecting SAA, weak turn-around strategies, and ongoing debates about prescribed assets and quantitative easing.
The implications of the ongoing factionalism are that the government no longer has sufficient gravitas and unified purpose to undertake the wide-spread reforms that could resurrect the economy in the long-run. While funding from global lenders including the IMF, World Bank, and Development Bank may get us through the Covid crisis and short-term financial challenges, the likely delayed structural reforms will mean that the country will face the feared sovereign debt crisis, according to Minister Mboweni, by 2024.
At that stage, South Africa will have little choice other than to accept a large conditional bailout from the IMF.
As history shows, this will then likely include some form of structural adjustment programme, with its accompanying cuts in public sector employment and wages, privatisation of state-owned entities, labour market reforms, and monetary and broader fiscal policy interventions.
This will naturally lead to significant socio-economic and political instability: a reshaping of the country’s economic foundations, a potential collapse of the ANC alliance, and South Africa’s young democracy as we know it coming to an end.
Associate Professor Sean Gossel is Research Director at the UCT GSB and lectures on public sector finance on the MCom (Development Finance) programme, the emerging markets economic development elective on the MBA programme, and macroeconomics on the EMBA. Views expressed are his own.