SOUTH AFRICA’S ECONOMIC CANARY – 17 MARCH 2021
Many years ago, coal miners used to take caged canaries underground with them. These canaries alerted miners to the presence of lethal gasses and saved countless lives.
The Minister of Finance presented the 2021/22 National Budget to Parliament in the most difficult of circumstances recently, after South Africa’s gross national product (GDP) contracted by more than 7% in 2020.
The two important aspects in the Budget document were the budget deficit of 14% for 2020/1 (by how much expenditure overshoots revenue) and increased national debt to finance the deficit (national debt-to-GDP ratio of 80.3%). In general, one should acknowledge that the Minister and National Treasury did as well as could be expected in the prevailing conditions.
South Africa’s GDP for 2021/22 is projected at R5 352.2 billion and the consolidated budget revenue is projected at R1 520.4 billion, of which tax revenue amounts to R1 365.1 billion. The public sector wage bill in the 2021/22 budget amounts to R650.1 billion and the debt service cost is projected at R269.7 billion. It is important to reach the revenue target set out in the budget and to control the spending on salaries and interest payments.
Put into perspective, in fiscal 2020/21 South Africa’s consolidated budget revenue was absorbed by:
- 47% on public service compensation (i.e. R47 out of every R100);
- 17% on debt service cost on public debt (i.e. R17 out of every R100); and
- 16% on social security grants (i.e. R16 out of every R100).
The combined expenditure on interest payments, the public service wage bill and social security allowances amounts to 80% of consolidated budget revenue. South Africa spends R80 out of every R100 of government revenue on interest, salaries and social grants. Government is taking measures to contain the public sector wage bill while it is necessary to maintain the current structure of social security allowances.
To date, South Africa could maintain a large public debt of approximately R3 950 billion because of the low interest structure that prevails around the world. The net financing cost on South Africa’s public debt for 2020/21 is estimated at 5.89% (debt service cost divided by outstanding debt).
| Impact of stable interest rates on South Africa’s debt service cost relative to GDP and budget revenue | 2020/21 | 2021/22 | 2022/23 | 2023/24 |
| GDP (R billion) | R4 921.0 | R5 352.2 | R5 666.7 | R5 997.2 |
| Consolidated budget revenue (R billion) | R1 362.7 | R1 520.4 | R1 635.4 | R1 717.2 |
| Debt-to-GDP ratio (%) | 80.3% | 81.9% | 85.1% | 87.3% |
| Estimate of outstanding debt* (R billion) | R3 951.6 | R4 383.5 | R4 822.4 | R5 235.6 |
| Debt service cost (R billion) | R232.9 | R269.7 | R296.7 | R322.1 |
| Effective financing cost** (%) | 5.89% | 6.15% | 6.15%*** | 6.15%*** |
| Debt service cost as % of consolidated budget revenue | 17.1% | 17.7% | 18.1% | 18.8% |
| Debt service cost as % of GDP | 4.7% | 5.0% | 5.2% | 5.4% |
* GDP x debt-to-GDP ratio, ** Debt service cost ÷ Estimate of outstanding debt, *** Assumption: Net financing cost remains stable, Source: 2021/22 Budget Review
If global interest rates remain low and the net financing cost on South Africa’s debt remains at 6.15% as projected for 2021/22 (using the Minister’s assumptions for GDP growth, revenue growth and the debt-to-GDP ratio), debt service cost would increase to 18.8% of consolidated budget revenue by 2023/4.
However, if global interest rates and South Africa’s net financing cost increase by 1% per year for fiscal 2022/23 and 2023/24, the net financing cost would amount to approximately 25% of consolidated budget revenue. If spending on salaries and social grants remains constant, the combined spending on salaries, social grants and interest payments would come to 88% of government revenue.
The estimated impact of a rising interest structure of 1% p.a. on fiscal 2022/23 and 2023/24 is as follows:
| Impact of RISING interest rates on South Africa’s debt service cost relative to GDP and budget revenue | 2020/21 | 2021/22 | 2022/23 | 2023/24 |
| GDP (R billion) | R4 921.0 | R5 352.2 | R5 666.7 | R5 997.2 |
| Consolidated budget revenue (R billion) | R1 362.7 | R1 520.4 | R1 635.4 | R1 717.2 |
| Debt-to-GDP ratio (%) | 80.3% | 81.9% | 85.1% | 87.3% |
| Estimate of outstanding debt* (R billion) | R3 951.6 | R4 383.5 | R4 822.4 | R5 235.6 |
| Debt service cost (R billion) | R232.9 | R269.7 | R344.9 | R426.8 |
| Effective financing cost** (%) | 5.89% | 6.15% | 7.15%*** | 8.15%*** |
| Debt service cost as % of consolidated budget revenue | 17.1% | 17.7% | 21.1% | 24.9% |
| Debt service cost as % of GDP | 4.7% | 5.0% | 6.1% | 7.1% |
* GDP x debt-to-GDP ratio, ** Debt service cost ÷ Estimate of outstanding debt, *** Assumption: Net financing cost increases by 1% p.a. in 2022/23 and 2023/24, Source: 2021/22 Budget Review
It is questionable if any country would be able to negotiate such a challenge successfully.
The key factors for South Africa’s economic future are:
- South Africa must achieve the GDP growth assumptions used in the National Budget.
- The revenue targets used in the National Budget must be achieved.
- Spending on the public sector wage bill must be curtailed as envisaged by the Minister; and
- Net financing cost must remain at manageable levels.
GDP growth, revenue targets and the public sector wage bill are all aspects over which Government can exert control. Government cannot control the global interest rate structure that ultimately determines South Africa’s net financing cost.
The global interest rate structure is the canary to South Africa’s economy. If net financing cost remains manageable, South Africa has a good chance of economic advancement, but if global interest rates rise sharply, it would be difficult for South Africa to improve its economic position, even if the public sector wage bill is contained.