This year’s global growth was projected to be similar to last year at around 3.2%. By contrast, for South Africa growth was expected to accelerate from 1% to 1.7% in 2026. While it is still early to gauge the impact of the war in Iran, we estimate that global growth is now likely to slow to between 2.95 and 3.1%.
As South Africa is a net oil importer, the effect on the local economy is likely to be amplified should a protracted conflict result.
Before the latest budget we had found ourselves in somewhat of a bind. Our debt-to-GDP ratio was projected to peak next year at about 79%, with interest payments already consuming a fifth of government revenues. The rise in debt levels should ring alarm bells for two reasons.
An influential paper by Harvard economists Carmen Reinhart and Kenneth Rogoff in 2010 showed that when national debt exceeds 90% of GDP, growth drops sharply and can become negative. Perhaps we should find solace in the fact that in 2013 a graduate student found errors in the above calculation, noting that countries with such debt burdens could still grow at more than 2%.
Nonetheless, our national debt burden has been growing to unsustainable levels, requiring interventions to reduce the budget deficit and forcing the government to live within its means and limit the continued growth in the debt-to GDP-ratio.
What is harder to ignore is that most credit ratings agencies use a 20% interest payment-to-revenue threshold for developing economies, forewarning a potential period of stress for public finances.
National budget
This year’s budget was important as it marked a clear break from our slippery national debt slope. The Treasury projects that our debt ratio is expected to stabilise for the first time in 17 years.
The recent budget projects an acceleration in tax revenue for the next fiscal year (2026/27), driven by strong expected corporate tax revenue, growing by close to double digits. This would allow relief for the personal taxpayer, who has been subject to bracket creep for the past couple of years.
The budget saw non-interest expenditure growth curtailed in real terms, driven mainly by a reduction in financial injections to state-owned enterprises. This is reminiscent of the mid-1990s, when then finance minister Trevor Manuel was able to curtail non-interest expenditure-to-GDP over his term.
Last November, S&P Global upgraded the credit rating of our sovereign debt — the first time in two decades. S&P also assigned a positive outlook, hinting that another upgrade could be expected if the government made good on structural reforms. Last week S&P confirmed once again that the budget was supportive of its positive outlook, provided the global picture did not deteriorate substantially.
Fiscal sustainability
The other side of the debt-to-GDP equation is to ensure the sustainability of our debt by boosting economic growth, as this will help improve the revenue side of the fiscus and lower the budget deficit further.
To crowd in private capital to fund large infrastructure projects, the government needs to keep debt levels under control to lower borrowing costs. South Africa needs to regain investor confidence to retain a lower risk premium on government long-term funding.
We can also look forward to stronger monetary policy transmission, where the South African Reserve Bank can focus on entrenching its new 3% inflation target. The rising interest payment burden on the national debt has had the effect of squeezing out much-needed areas of spending, especially infrastructure, education and healthcare. This resulted in our ratio of gross fixed capital formation (investment) to GDP falling to levels lower than in the 1990s.
By ensuring that our debt is on a sustainable path, the Treasury can then resist the temptation to hike taxes or rely on inflation to erode the national debt. In the long term this should reduce rand volatility and attract foreign investment.
With supply bottlenecks remaining the biggest constraint to growth, infrastructure spending remains key to unlocking the electricity, freight rail and port sectors. The Reserve Bank has already estimated that load-shedding reduced potential growth by 2% of GDP. Therefore, private generation and grid expansion are expected to boost growth.
Investment in freight rail should also help bulk commodity exports, with coal exports having dropped by a third over the past decade, and improving port efficiency will also reduce congestion. While estimating the multiplier effect of infrastructure spend is fraught with difficulty, these are the most tangible ways to lift growth by at least 1% in the short term.
Finally, the government is under pressure to provide a fiscal anchor — a long-term commitment that our public debt to GDP will decline towards a transparent target. Treasury director-general Duncan Pieterse and his elite team have so far opted for a “principle-based” fiscal anchor rather than committing to a precise target in the public domain.
As we enter a period of volatility, the country will rely on the policy credibility the recent budget has achieved to convince market participants, as was the case two decades ago, that the government has the will and wherewithal to deliver on this long-term promise.
• Rassou is chief investment officer at Ashburton Investments.
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