Business interest group Sakeliga says South Africa’s latest round of data shows that the country is in deep financial distress – a situation that is almost always followed by state failure.
Government finances have deteriorated sharply in 2023 as tax receipts have fallen further behind the pace of spending.
“Government borrowing has now swelled to around R100 billion per quarter, from an already-imprudent R50 billion per quarter just a year ago,” the group said.
Sakeliga noted that the government has run up so much debt since 2008 that interest payments to service its overall debt have spiralled up to nearly R100 billion per quarter as well.
“In other words, almost all government borrowing currently is being used to cover interest obligations from previous borrowing. Not a healthy place to be,” it said.
Meanwhile, other state and government entities such as large state-owned enterprises and municipalities have since 2008 racked up hundreds of billions in new debts, with a rising expectation that these debts will be guaranteed or bailed out by the national government.
Therefore, actual and probable liabilities of the national government have soared in the past 15 years while infrastructure investment has been either neglected or wasteful, and economic value added has stagnated.
“The result is that South African government bonds are less trustworthy than they once were. Lenders require higher interest rates as compensation for taking the (rising) risk of lending to the South African government,” it said.
According to Russell Lamberti, the executive director for research at Sakeliga, a deteriorating financial position brings forward immense risks, including pressure on the rand and banking system, desperate politicians pushing for short-term wins to maintain power, and ultimately failure of the state.
“Fiscal distress almost always goes hand in hand with accelerating state failure,” he said.
“While we see state failure as an opportunity to build a healthier and more independent business environment, swift failure in key areas exposes businesses and communities to a rapid onset of more crime and violence, infrastructure decay, and administrative collapse.”
South Africa’s fiscal problem is not a tax problem, he said; it’s a spending problem.
“South Africa is a high-tax country with a comparatively high rate of tax compliance by global comparison. Tax receipts are a higher percentage of GDP today than at any time in the previous 45 years for which we have data.”
Adjusting for inflation, tax receipts are higher in 2023 than they were before the Covid-19 lockdowns, and around 50% higher than in 2008.
“This is not a tax problem. What is evidently lacking is spending restraint and responsible fiscal management,” he said.
Weaker rand, tax hikes and more corruption
The government’s “persistent inability” to cut spending and address chronic waste in procurement signals the other risks.
Although short- and medium-term fluctuations in the exchange rate are hard to predict, fiscal stress portends a less resilient and more volatile currency, which harms business and investment conditions, Lamberti said.
“Fiscal risks are also a direct threat to the stability of the local banking system, not only because government is a major employer and spender in the economic system, but more directly because government bonds are a major asset holding of banks.
“A bond market crisis, as occurred during the 2020 lockdown, leads to a banking crisis and commercial credit crunch.”
On policy risks, the director said that diminishing tax receipts and public resources lead to governments seeking desperately to escalate policies that would extract resources from productive sectors of society.
“This can include tax hikes, printing money, and regulatory devices to extract levies, fees, fines, patronage and control for government officials, including asset grabs like special wealth taxes and land expropriation,” he said.
Finance minister Enoch Godongwana has already alluded to possible tax hikes coming to help South Africa pull out of its financial crisis.
“We should expect enhanced efforts by the government to escalate BEE, raise taxes and close loopholes, tighten rather than loosen exchange and capital controls, add regulations to scoop fees and levies, and escalate corruption,” Lamberti said.
He added that there is also an “ominous risk”, although not presently urgent, that the government will seek to use the South African Reserve Bank to print money to finance state activities.
“Rather than needing to extract more precious resources from the private sector, the government needs to deal with the rising fiscal pressure by cutting spending in the order of 20-30%,” he said.