Top economist calls for immediate action to address SA’s debt trap

Top economist Dawie Roodt painted a bleak picture of South Africa’s economy.

Roodt highlighted how government debt has doubled from less than 30 per cent of GDP before the 2008 global financial crisis to nearly 60 per cent.

His concerns follows recent reports by the Institute of International Finance that South Africa’s debt could reach as high as 95 per cent of GDP by 2024.

According to the group, low growth, high-interest payments and a decade of mismanagement are the primary reasons for this increasing debt.

Roodt mentioned how South Africa’s fiscal situation has deteriorated sharply, mainly due to bailouts for Eskom and other struggling state-owned enterprises.

“For the past 10 years, the ANC has destroyed the country’s fiscal accounts, including basically all the SEOs,” said Roodt.

He lamented SA’s fiscal deficit, which is the difference between the government’s expenditure and the government’s revenue.

“We have seen a drastic increase in state expenditure, as a result of the wage bill and state debt. These government employees are overpaid and do not have enough work. At the same time, our state revenue is lagging and so the economy is slowing down.

“In regard to collecting revenue, there are also serious problems with tax revenue being under enormous pressure. Therefore, the fiscal debt that South Africa faces is unsustainable. We are definitely caught in a debt trap.

“The reality is that our economy is slowing down, and could hit zero per cent or even experience a retraction. And with the growth in population, unemployment will also go up.”

Roodt also believes South Africa can expect to lose its final investment-grade rating.

While some reckon it would trigger more billions to flow out of the country, causing the rand to weaken to its lowest level in almost four years, Roodt believes in the long run it might just help the South African economy.

“South African assets may even rise in the aftermath, especially if sentiment toward emerging markets stays strong. With potential interest rates going up and the already undervalued rand suffering further, this could result in a volatile market of money flowing in and out easily.

“Good news is we do not need an IMF loan if we continue to struggle. The Reserve Bank sits with a healthy gold reserve,” said Roodt, who also believes the national health insurance will not happen because it will cost too much and the government is not competent to run such a fund.

He warned that South Africans must brace themselves for an increase in taxes next year, which could even mean an increase in the fuel levy and VAT.

“Problem is such increases on a labour force which is already overburdened with tax will probably not bring in enough money to keep the economy going. So the government will keep on borrowing and so debt will increase.”

Roodt said the government must make urgent decisions on the way forward to deal with fiscal debt, which could include cutting back on state spending, or cutting on the wage bill.

“In regards to the wage bill, the problem is that Cosatu is part of the tripartite alliance. They will keep on pressuring government not to cut down on the public sector, or on salaries.

“We saw the power of organised labour in the recent strike at the SAA. Organised labour has a chokehold on government, and I predict we will see such a stand-off at Eskom as well.”

Regarding South Africa’s politics, Roodt said that Ramaphosa is a good guy but a weak president.

“We have to remember he won by a tiny minority, and still today his political support is very slim. There are many centres of power, and the ANC is embroiled in an ideological conflict. What does the ANC stand for anymore?

“The president it seemed made a good move of appointing the Presidential Economic Advisory Council with effect from October 1, which means he is being advised by 18 economists. This is, however, a recipe for disaster. With so many economist sharing their opinion, nothing will really happen.”

He said more than ever SA needs confidence back in the economy to draw investors.

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