South Africa is facing a fiscal crisis, with the government's finances deteriorating and its debt burden and debt-servicing costs increasing. The state spends more than it gets in, leading to a growing fiscal deficit and the need to borrow money to make ends meet. FirstRand CEO Alan Pullinger expects the government to continue to issue more debt to finance this growing deficit, as the commodity boom has ended and the economy cannot fill the gap. The government will have to borrow R500 billion over the next year to finance the growing fiscal deficit or R2 billion per weekday on average.
Nedbank CEO Mike Brown has raised concerns about the rising debt and interest payments needed to service it, which increases the risk premium attached to investing in South African assets. This is driven by load-shedding, logistics constraints, crime and corruption, and questions over the country's foreign policy. The rising risk premium has resulted in the demand for government bonds from foreign investors falling, negatively impacting investment.
Pullinger warns that pressure on the government to cut spending will increase as the country may run out of money. Renowned economist Dawie Roodt previously cautioned that South Africa is running out of money, but the spending cuts were not palatable in an election year. South Africa's fiscal deficit is expected to be much larger this year than Finance Minister Enoch Godongwana budgeted for, with the deficit between 6% and 6.5% of GDP, much higher than the minister's expected 4%.
The only way to reduce the country's debt is to increase income through economic growth or cut spending. The economy is under pressure due to the government's business-unfriendly policies, leaving spending cuts as the only option. However, announcing cuts to public sector employees, salary freezes, or reducing social grants will be unpopular.
This article is republished from the Daily Investor by Shaun Jacobs. Click here to read the original article.
