South Africa’s debt level is the highest it has ever been and with a looming ratings downgrade, which will result in higher interest on this debt, the country is facing a very tough financial situation.
One of the measures which shows South Africa’s economic problem is Debt-to-GDP – a ratio between government debt and its gross domestic product (an estimate of the size of the economy).
A low Debt-to-GDP ratio represents an economy that “produces and sells goods and services sufficient to pay back debts without incurring further debt”.
In South Africa, the opposite is happening. Economic growth has slowed to just above 0% and government spending is increasing all the time.
South Africa was making excellent progress under former president Thabo Mbeki, but then the financial crisis hit and Jacob Zuma became president.
Economist Mike Schussler from Economists.co.za explained that first the Debt-to-GDP increased as South Africa needed spending from the government to stabilise the economy during the 2008/9 recession.
However, the government just continued to spend. This included employing at least 20% more public servants who received salary increases far beyond inflation.
“We also had public works programmes and we had extra spending on social grants. We can also add the higher prices for goods because of BEE requirements,” he said.
These aspects increased South Africa’s debt levels to record highs and continue to drive up the country’s Debt-to-GDP ratio. This trend is of concern, said Schussler.
Unless the South African government cuts spending and encourages economic growth, this trend will continue and lead to a ratings downgrade.