It is a well-known fact that government’s debt-to-GDP ratio is going to be around 56% by the end of March 2019. Debt from state-owned enterprises (SOEs) is likely to add another 35% by the end of the month.
Total public debt issued is therefore likely to be 91.5% by end March. This is the highest level the total public debt-to-GDP ratio has ever been.
The last time South Africa had similar debt levels was in the middle of the 1980s, and it was very difficult to finance that amount of debt. Government was on the verge of defaulting and was looking at ways to re-enter the world with the then prime minister failing to cross the Rubicon in a speech a few quarters later.
South Africa made use of financial experts in Switzerland to find money on a daily basis as sanctions hurt. Sanctions by overseas pension funds and, later, banks, made it more difficult to pay the interest, which peaked north of 18% in January 1986.
Moreover, South Africa in the 1980s had prescribed assets, which meant that 53% of one’s pension had to be invested in government and SOE bonds. This was done so that the government had access to money for the debt repayments it had to make.
Although interest rates rose, this did not completely compensate for all the risks such as inflation and a possible default by government.
The situation got so out of hand that when a person in New York wanted to know what the Swiss franc-dollar exchange rate was, they would phone the then Transnet dealers. Nedbank was at times rumoured to be the biggest Swiss franc-dollar trader in the world. Incredible for a relatively small South African bank in the 1980s.
Far away from the public eye, however, the Nats [National Party government] were talking to the ANC, while others went on Senegal safaris. Namibia gained independence and the SA National Defence Force withdrew from the then South West Africa.
Iscor was en route to being privatised as the socialist Nats needed cash – although it took another five years before it happened in 1989. Lux Air brought competition on some European air routes against SAA. Private airline Flitestar could operate domestically as SAA didn’t have the cash for more planes.
M-Net was allowed to compete against the SABC and Sunday trading started, all to get the economy going.
In 1990 Nelson Mandela was released and the ANC was unbanned by FW de Klerk. Before him, however, PW Botha and the justice minister were already in talks with Mandela. South Africa needed foreign funds and relief from the then lower, but still high, debt levels.
As SA had too many power stations, it drew investment with very cheap electricity prices, never to be seen again. It attracted Alusaf and other big power users. This then brought the cheap power and the money to help pay off the Eskom debt at the time, while our railways made plans to export coal at a cheaper rate to generate revenue.
Now South Africa’s total debt burden is about 3% higher as a ratio of GDP and the country is heading to the same repayment concerns as then.
Today it is not financial sanctions but a rating downgrade that will get foreign capital to the local debt market. A downgrade due to the high public debt levels and low growth that SA has now reminds one of the 1980s.
SA’s current total debt-to-GDP ratio means that the country will struggle to finance the debt, much like during the 1980s, but without the excess electricity to sell – and with load shedding, which means the economy cannot function at its full potential.
A downgrade from Moody’s will increase the yields on bonds as foreign bond index funds and pension funds are forced to withdraw from the SA market, much like JP Morgan and CalPERS (the California Public Employees’ Retirement System) did in the 1980s.
Like a weapon of mass destruction this will blow up government’s ability to borrow more and, with tax rates higher than most countries, the impact on government’s ability to spend will be felt.
Soon, government will not be able to afford increases in social grants or the government wage bill, and the cohesion that government spending brings will dissipate.
Just like the 1980s, the economy will force a change upon South Africa. There will be selling of assets, pragmatic economic decisions and, I suspect, the socialist and racist rhetoric will almost disappear from government mumblings.
Bill Clinton said: “It’s the economy, stupid” during his election campaign against George Bush senior.
Well, economic reality is about to make a comeback in SA. Instead of wanting to know who won the elections, South African businesses will want to know what the outcome of the election means for the economy and how the politicians will react to the new economic reality.
Politicians will pray at the biggest altar of mass destruction ever – interest rates. They will pray for mercy at this altar, even if they have no religion or respect for markets.
Expect unions to fight for pension fund returns when prescribed assets, in one form or another, are implemented. Our old age is under threat of poverty and relying on a social pension will not be good enough for the majority of South Africans.
Expect bumps and turns before a whole host of reforms are packaged and sold as new solutions to very old problems. Expect some universities to close, SOEs such as SAA to disappear and many a government official to look for a new career.
The road to the future I describe will, however, be full of twists and turns and one must be careful not to panic. Save as you never have before, or more, because when you retire it will be harder. Diversify as fast and as much as possible, but remember that you are now able to do more than before, and the politicians are about to dance to a new tune.
Mike Schüssler is chief economist at Economists.co.za
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