South Africa went from great to junk by Drikus Greyling

 

South Africa’s credit rating plummeted over the last fifteen years, driving it deep into junk territory as it grapples with serious financial challenges.

When South Africa held its first democratic elections in 1994, Fitch and S&P rated its sovereign debt below investment grade. Moody’s rated the country at the lowest investment grade level.

President Nelson Mandela and Deputy President Mbeki focussed on implementing a coherent growth and development strategy.

They planned to gradually reduce the fiscal deficit, avoid a debt trap, and limit any real increase in recurrent government expenditure.

The Mandela presidency stabilised the country’s finances and achieved an average economic growth rate of 3.0% between 1994 and 2000.

When Mbeki took over from Mandela, this trend continued, and the country achieved strong economic growth and significantly reduced its debt-to-GDP ratio.

South Africa’s credit rating improved, and Fitch, S&P, and Moody’s rated the country well above investment grade.

However, things changed quickly after Jacob Zuma became president and Pravin Gordhan took over from Manuel as Finance Minister.

Spending increased, debt skyrocketed, and South Africa’s debt rapidly increased to unsustainable levels.

The trend accelerated under Cyril Ramaphosa’s presidency, with many economists warning that South Africa is facing a fiscal cliff.

This reckless spending and increased debt took its toll on South Africa’s sovereign credit ratings, which plummeted to well below investment grade.

Moody’s dropped South Africa two notches below investment grade, while Fitch and S&P rated the country three notches below investment grade.

Although South Africa remained at these levels over the last three years, there have been some positive signs from the ratings agencies.

However, all the credit ratings South Africa received are still below investment grade, also known as “junk status.”

In September 2024, Fitch Ratings gave South Africa’s sovereign debt a credit rating BB- with a stable outlook due to a more stable political environment.

S&P Global also gave South Africa a BB- credit rating for foreign currency investment and a slightly higher rating of BB for domestic currency investment.

S&P had a positive outlook based on its view that the GNU government would be able to implement better reforms.

South Africa’s real GDP per capita

Rating agency Fitch highlighted several factors that constrained South Africa to its junk credit status.

These include low real GDP growth, high levels of poverty, high levels of debt, and a budget dominated by fixed payments.

Real GDP per capita is an economic indicator measuring a country’s total output, adjusted for inflation, per person. It is a widely accepted measure of a country’s living standard.

Measuring South Africa’s real GDP per capita shows that South Africans have a worse standard of living today than what they experienced in 2007.

In 2007, the annual real GDP per capita was R77,047. In 2023, the annual real GDP per capita was only R74,411.

This confirms Fitch’s observation, indicating that, in real terms, South Africans are worse off today than they were in 2007.

South Africa’s budget deficit

As spending increased over the last fifteen years, South Africa’s government debt has risen to dangerously high levels.

The primary reason for increased debt levels is that the government is spending more money than it receives.

In 2023/24, the National Treasury budgeted a R347 billion deficit, which translates to 5% of South Africa’s GDP.

This means the South African government spent R347 billion more than it received in annual revenue.

This represented an 18% overspending on the Government’s total projected revenue of R1.92 trillion for 2023/24.

Government deficits are primarily financed by taking on more debt or by printing money rapidly, adding inflation to the consumer’s bill.

South Africa has not had a budget surplus since 2007, which explains why the country’s debt-to-GDP ratio increased so rapidly.

South Africa’s debt-to-GDP

The consistent deficit has pushed South Africa’s debt from 27.8% of GDP in 2008 to the current estimated debt to GDP of 74% for the 2023/24 year.

When factoring in debt from state-owned enterprises (SOEs) and local authorities, South Africa’s effective debt-to-GDP ratio is nearing 90%.

The government guarantees a large amount of debt from SOEs, and local authorities also owe sums.

Ultimately, the Minister of Finance may need to bail these entities out, but this debt isn’t included in the official debt-to-GDP calculation.

“If you include that debt, then we’re probably talking about a debt-to-GDP ratio in the region of about 90%,” economist Dawie Roodt said.

South Africa’s rigid fiscal structure

Another critical issue Fitch highlighted is South Africa’s rigid fiscal structure that hampers deficit reduction.

This means that South Africa’s budget has many fixed expense line items, which makes it difficult to address its budget deficits.

It is important to note that South Africa’s government is behind all these expense items due to poor fiscal management.

These expense items include government employee salaries and wages, social grants, and interest payments on government debt.

70% of 2023/24’s total government revenue was allocated to only these three items. It leaves very little room before the budget is exceeded.

These expense items are fixed and difficult to adjust, primarily due to the risk, including social unrest.

The majority of the government’s efforts should be focused on these expenses to tackle South Africa’s looming debt threats.

Government salaries and social grants must be reduced to lighten the load on the Treasury’s budget.

More capital can then be allocated toward paying off debt and lightening the interest burden on South Africa.

 

SOURCE:South Africa went from great to junk – Daily Investor