Rand Merchant Bank chief economist and head of research Isaah Mhlanga noted on Thursday that looking at the emerging economies of neighbouring countries, it is quite clear that South Africa’s relative debt is out of sync, adding that South Africa has a debt problem in addition to a growth problem.
Mhlanga was speaking during the North-West University (NWU) Business School webinar ‘Tipping Point - Turmoil or Reform? South Africa's political economy after 2024’ where he explained that the country’s debt servicing cost now took about R0.21 in every rand of revenue.
“We don't disagree on the growth problem. … [our peers'] growth has been below 2% for a very long time. It hasn't grown above that for any substantial time after the global financial crisis. But where the disagreements lie is whether we have a debt problem or not, and if we are to look at South Africa's debt relative to other peer emerging economies it is quite clear that our debt trajectory is out of sync with our peers,” he said.
Mhlanga explained that if one looked at the country’s debt costs relative to peers, it was evident that the interest costs were actually outside of the interquartile range of emerging market peers, which he said meant that it increasingly crowded out the country’s other spending.
Columnist and analyst Khaya Sithole noted that the amount spent on debt and the commitments that South Africa had, even before accounting for contingent liabilities, gave the impression that the debt trap was already where the country was stuck.
“You list some of them and I was reading through them and saying wait, hold on.
"I see that these are indeed unsound policy choices, but if I'm looking ahead of it at this particular election, I do not know whether whoever emerges in government after that time is actually going to do anything to reverse those and undo some of them, because they seem to be tapping into what one might call the pulse of South African society,” he said.
PROBLEMS CAUSING DEBT IN THE ECONOMY
Mhlanga noted that rising interest payments crowded out other capital spending at a national level as well as at a State-owned enterprise level, saying this could be seen from 2014 in capital spending.
He added that this showed up in the country’s debilitated infrastructure – roads, rail, ports – all of this having its genesis in the consolidation in capital spending rather than in current spending, he said.
He highlighted that the increased bank holdings of South African government bonds implied less capital available from the banks to lend in other productive sectors of the economy, as they were increasingly holding government bonds.
“…that in itself is also a problem that we are seeing, which is crowding out productive capital,” he said.
He noted that the general deterioration in creditworthiness that had been communicated in South Africa losing its investment grade, ultimately showing up in a weaker exchange rate, was in itself also inflationary but had increased the cost of capital goods across the economy.