The debate over fiscal policy, already heated, is bound to escalate as we approach the announcement of the National Treasury’s medium-term budget policy statement (MTBPS).
The medium-term budget will be one of the most important yet, which is not to say the previous ones were not important. It is just that every year that we fail to arrest the fiscal deterioration makes the question of debt even more important. If we again fail to deal decisively with the national debt issue, 2024 will be even more important than this year, and this year is already critical.
The state of our fiscus, best summarised by the size and growth of our national debt, is perilous. IMF data shows that SA has had the second-highest escalation of debt to GDP of all the large emerging markets in the past five years, and will have the same rank in the coming five. Only China in my subset of large emerging markets with market access is expected to see debt grow faster than SA.
This debt dynamic has created a toxic mix for rates, the rand and domestic assets in general. Moreover, the state’s ability to respond to crises big and small is now severely constrained. The pall of uncertainty is palpable, and the erosion of service delivery obvious. On the current trajectory, SA debt is exploding. How do we get out of this?
The theory of debt dynamics holds that to stabilise debt a country must run a primary balance — that is, revenue less non-interest expenditure equal to the difference between its real interest rate and its real growth rate. SA’s real long bond rate is about 5% and its real growth rate about 1%. Without a shift in growth and interest rates, government must thus run a primary surplus of about 4% of GDP to stabilise debt.
The Treasury managed a tiny 0.1% of GDP primary surplus in 2022, the first surplus since 2009. We forecast that the state could record a primary deficit of more than 1% of GDP in 2023, five percentage points lower than the debt stabilisation level. Debt will continue to balloon, deepening concerns about fiscal sustainability. We can’t carry on this way.
Cheap funding
Policymakers must deliver some combination of policies that put the country on a different debt path. A functional policy approach will raise real growth rates (structural reform) and/or increase the primary balance (austerity) and/or lower real interest rates (cheap and plentiful funding). Any combination of these with the correct level of intensity will do. The more of one, the less of another will be needed.
If you widen and hasten growth-enhancing reforms you can get away with less austerity. If you get cheap funding from somewhere, say the IMF, you can be slow on reform and not do as much austerity. What you cannot do is to carry on with business as usual. As time passes the problems deepen and become ever more difficult to solve.
SA has been on a reform path since the start of the current administration. However, reform breadth has been narrow, momentum disappointingly slow, and benefits are expected to accrue only slowly over the coming years. Getting the primary balance higher — what some will term austerity — is key.
I do not expect primary surpluses of 4% of GDP as suggested by my simple analysis. However, I believe a material surplus is a necessary step to proving that the state is serious about containing the debt problem. If the state fails to cut expenditure and broaden and/or hasten growth-enhancing reforms, SA will find itself with unpleasant choices.
These include watching a further collapse of service delivery and worsening economic and welfare outcomes for citizens, and having to go cap in hand to the IMF for financial support. Whatever policy decisions are taken in the coming weeks and months must be assessed in this light.
• Lijane is global markets strategist at Standard Bank CIB.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.