ECONOMIC COLLAPSE: Debt to exceed GDP: South Africa is about to enter several years of austerity: economists – My Analysis
[This country is collapsing economically. Years of mismanagement, years of corruption and the continual wastage have all taken their toll. Here they are talking about fixing things when in fact, ratings agencies have downgraded the country recently and cite no reasons why they will ever upgrade the country. In fact, the reality is MORE DOWNGRADES TO COME. A really bad situation is that DEBT will begin exceeding GDP! This is a pit from which we cannot get out. We are endlessly rolling over the debt too. This place is a clown show. But let me tell you why I don't believe this situation can be recovered from at all: I've watch this Govt and it is too corrupt AND they have a total inability to CUT COSTS. THEY CANNOT CUT COSTS. THIS WILL NEVER HAPPEN. South Africa has gone over the edge of the cliff and it is NOT going to magically suddenly float upwards. We are heading firmly for total collapse, which I am looking forward to. This idiotic clown show is of no interest to me. Jan]
Austerity, or a programme of fiscal consolidation, almost always follows a period where governments overspend, relative to the capacity of their economies to generate revenue. The same is true of South Africa.
As has happened in other countries, excessive and often wasteful spending has now forced the South Africa government into a multi-year consolidation plan, says Stellenbosch University’s Bureau for Economic Research (BER).
In a research note on Thursday (11 February), the group said consolidation needs to be done in a way that limits further damage to growth and the country’s social fabric.
“The global experience with consolidation provides some guidelines on how this can be achieved,” it said.
“Preferably, the consolidation should be focused on expenditure reductions as opposed to tax hikes. In addition, the spending cutbacks should be targeted at current, mainly wage bill expenditure with capex being protected.”
It added that speedy implementation of revenue and growth-enhancing reforms could help to soften the adverse GDP impact of fiscal consolidation.
“Based on these guidelines, it is hard to fault the Treasury’s fiscal consolidation plans. Indeed, it seems to tick all the boxes. However, it is not uncommon for SA policymakers to come up with reasonable plans.”
The trick
The BER said that the ‘illusive trick’ is to follow through on the plans with no-nonsense implementation.
This refers both to the growth reforms and the expenditure reductions, it said.
Because so much of South Africa’s consolidation drive rests on the politically-sensitive wage bill, economists, investors and analysts have been sceptical as to whether implementation will follow.
“Our current baseline scenario forecast suggests some slippage on the consolidation drive. This risks a fiscal crisis over the next three to five years.”
However, it is not clear exactly how such a crisis will play out, the group said.
“One scenario is a financing crisis where the private capital markets are simply not willing to continuously roll over an ever-growing amount of SA debt.
“This will most likely force the government to look for alternative funding sources. At this stage, we do not foresee a sovereign debt default in the foreseeable future.
“However, especially over the medium term, this risk should not be totally discounted.”
Downgrades
Ratings agencies have long warned South Africa over its growing debt crisis and inability to cut spending or grow the economy. This resulted in the country being shifted to full junk status in 2020 as the economy entered into recession.
In November 2020, Moody’s cut the nation’s foreign- and local-currency ratings to Ba2, two levels below investment grade, from Ba1. The outlook remains negative. In the same month, ratings agency Fitch cut South Africa’s foreign- and local-currency ratings to BB-, three levels below investment grade, also with a negative outlook.
In a note published this week, Moody’s said that it will likely downgrade South Africa further if its debt burden continues to grow.
The coronavirus pandemic has exacerbated the deterioration of South Africa’s government finances because it weighed on revenue collection, raised the cost of borrowing and pushed the economy into its longest recession in almost three decades.
“South Africa’s credit profile is increasingly constrained by strong, widespread fiscal pressures, including rising borrowing costs and persistently low growth.
“Progress on structural economic reforms has been limited amid social and political obstacles.”
It added that a lack of reforms, shocks to primary expenditure or revenues, or sustained rises in the level or volatility of interest rates could lead to another downgrade.
Moody’s said that a ratings upgrade is unlikely in the near future, but that it could change its outlook from ‘negative’ to ‘stable’ if the government shows that its reforms are effective.
The group forecasts that the country will reach a debt-to-GDP ratio of 100.7% by 2022.