Although the level of South Africa’s national debt has risen, it is still outperforming many developed countries, said Adriaan Pask, chief investment officer at PSG Wealth.
South Africa currently has a debt-to-GDP ratio of 67.4%, which is expected to rise to more than 71% in the next three years.
The cost of paying off debt is around R400 billion per year, making interest payments on debt one of the fastest growing cost items.
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However, Pask said that South Africa’s debt-to-GDP ratio is reasonable compared to other countries.
The debt ratio of the United States is 130%, that of the EU almost 90%, that of China about 80% and that of Japan 300%.
Pask said central banks around the world are raising interest rates to fight inflation, resulting in rising debt burdens, making it difficult to see where governments will get the revenue to pay off their debts.
South Africa has debt consolidation deals with the World Bank and the International Monetary Fund (IMF), but Pask said consolidating our debt at lower rates is a major concern as growth remains subdued.
He said the global debt burden and the rising costs of paying off debt are affecting three of PSG’s avenues: households, government and businesses and corporations.
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From a household perspective, South Africa is in better shape than global markets, despite bond and other debt servicing rising due to rising interest rates.
Nevertheless, the low level of consumer disposable income will affect businesses, while the cost of debt will also erode profit margins.
On a global scale, there is a major impact of rising tariffs, because companies want to save costs. For example, large technology companies – such as Google, Amazon and Microsoft – have laid off thousands of employees.
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In addition, companies are trying to deleverage as interest rates rise from next to nothing. Because capital is quite expensive, companies prefer to pay off some of the debt on their balance sheets rather than embark on share buyback programs.
He added that “modern monetary theory” complicates the government’s position, as it holds that a government can take on as much debt as it wants as long as it grows and repays the debt. However, the growth may not materialize, so perhaps governments are just adding more debt to their balance sheets. Some countries are therefore now over-indebted.
For example, the US has reached its debt ceiling, but Congress can lift the debt ceiling in June 2023. The US would then take on even more debt, some of which is used to pay off maturing debt – meaning it pays off its cheaper debt with more expensive debt, and the interest bill will continue to grow.
However, South Africa’s fiscal position is much less tense compared to other countries.
Finance Minister Enoch Godongwana said during the budget speech that the government should use the proceeds from the tax collection to invest in the future. Pask said this was encouraging, but noted that South Africa needs to balance taxes going to social security with investment for future economic growth.
He said controlling non-interest-bearing spending and stabilizing debt levels is crucial for the government, which goes hand in hand with good fiscal discipline.
He believes governments will face funding or interest bills in the years to come that they have never encountered before due to their existing high levels of debt.
Read: Alarm bells are ringing for middle-class and wealthy South Africans