Simply put, a fiscal crisis is when a government can no longer bridge the gap between its spending and its tax revenues. But what does that look like in practice? For South Africa, the horror scenario would be if foreign buyers of our debt decide they no longer want to lend to us, given our weak and worsening debt position and elusive economic growth.
The result would be nasty. The rand might bomb to R25 against the dollar, bond yields may rise so spectacularly that the cost of servicing our debt would suck up the money meant for every other budget item – like social grants and civil service wages – and inflation would spike. Growth, anaemic as it is, would crater.
“Everything falls apart,” says head of South Africa research at Citi, Gina Schoeman.
Whether this is on the cards in light of the budget hole created by the Western Cape High Court’s decision this weekend to set aside the contentious VAT hike is unlikely, however.
“Crisis is completely the wrong word,” says RMB chief economist Isaah Mhlanga. A crisis would be a “situation where the bond market is no longer comfortable to lend to us because it believes we can no longer service our borrowings. We are nowhere close to that.”
As he points out, South Africa has been issuing bonds since the beginning of this year, and demand has exceeded supply. Bond yields have also declined after spiking higher when US President Donald Trump announced he was increasing global tariffs. Yields, which move in the opposite direction to bond prices, surged from about 10.4% to 11.7%, and are now back down to only about 19 basis points higher than they were on March 12.
Then there’s the fact that the two-month wrangling over the VAT hike won’t practically affect government spending.
“Typically, in any year, the actual budget is passed in the second half of the calendar year,” says Mhlanga. “The fiscal framework might be delayed, but municipalities are allowed to spend up to 40% of the previous year’s allocation, which means they continue to operate as normal.”
So, what will now be a third attempt to craft a budget that everyone’s happy with isn’t, in itself, a calamity.
Last, there’s the actual size of the budget hole: R75bn over the medium term, which is the next three years. That’s a lot of billions, but in the context of a budget that targets R2.83-trillion of spending in 2027/28, and considering that the South African Revenue Service collected R9bn more in taxes than expected, the government should be able to fill the gap from somewhere.
Space to cut expenses
Not that finance minister Enoch Godongwana didn’t try to present the VAT hike as the only solution to balancing the books. According to his court affidavit, in reference to political parties’ alternative revenue-raising suggestions, he said: “I was of the view that the proposals made at the time would not provide sufficient revenue in the immediate term and therefore had no option but to persist with the VAT hike.”
This was the central contention of the DA’s disagreement with its largest partner in the government of national unity (GNU): that there were other options, not least cutting government spending.
“There’s at least 5% in any budget that can be scalped without it compromising service delivery,” agrees Standard Bank chief economist Goolam Ballim.
“Expenditure has not been under the spotlight for a very long time, if ever. The National Treasury and the ANC have always drawn on their muscle memory in a twofold manner: one, when you have an imbalance, you raise taxes, and the second is that it’s National Treasury that has the autonomy to make these decisions.”
That era is clearly over.
But Ballim is firmly in the camp that this is not a crisis. “Mathematically, the odds of a fiscal crisis are very, very low. And if we’re talking of a fiscal crisis, I think it’s necessary to frame it within the willingness and the ability of the authorities to consolidate public finances.”
He believes that Godongwana is “undimmed” in his commitment to fiscal consolidation. “Throughout this budget saga, there’s been no doubt that he wants to see the indebtedness figure crest in the near term.”
The question has been how to balance the imbalances. “I don’t want to trivialise it, but the debate was about tactics, not about the overriding commitment to a common cause, which is that public finances have been runaway for about a decade.”
Of that there’s no dispute. As Citi’s Schoeman points out: “Our debt levels have escalated so quickly over more than a decade that we are the fastest-growing emerging market in terms of debt accumulation.”
Unsustainable levels of debt
Consider that back in 2008/09, South Africa’s gross debt came to R627bn, or 26% of GDP. Economists were clutching their pearls in 2018 when debt was expected to peak at 55%. We’re now at 75%.
Economist Dawie Roodt believes this figure is actually closer to 90%, taking into account debt from state-owned entities and debt owed by municipalities to utilities like Eskom. And according to the latest International Monetary Fund (IMF) projections, our debt-to-GDP ratio will blow past the 76.2% peak that Godongwana and Treasury have set themselves this year, to hit 88.7% by 2030.
Yet, intriguingly, Ballim believes the spat over the budget “has been overarchingly a healthy one”. Why? Because the ANC now has to “recalibrate that muscle memory” and realise that there are viable alternatives other than simply raising taxes.
“Even though some are of the opinion is that this has been a serious misstep, I suspect that [Godongwana] is not going to invite the idea that National Treasury credibility is now fundamentally fractured. It’s certainly taken a dent in some of the choices they made, but that aside, he remains overarchingly a reasonably safe pair of hands.”
Schoeman backs the team at Treasury, too. “What’s stopping us from a fiscal crisis is our institutional strength: Treasury’s fiscal credibility, not [the] government’s fiscal credibility. And there’s a distinction there. Throughout this entire awful budget period we’ve been in, the one thing the GNU has agreed on because of Treasury’s line in the sand, is that no-one has suggested they borrow more.”
That’s not to say that Schoeman and Mhlanga aren’t critical of decisions taken on Treasury’s watch over the past 10 years.
“For a long time, the quality of our spending has been poor. If you just take social grants, salaries and wages, and our interest bill: those three items take about 90% of what is available to spend,” says Mhlanga. In other words, there’s very little left to actually lavish on the bricks and mortar investments required for economic growth.
He’s especially scathing about the state wage agreement this year. “It’s a terrible policy decision. You are saying to the market you want to consolidate the fiscus, but at the same time you are offering public employees a 5.5% increase in salaries – which is way higher than inflation. That is a confused message.”
Ballim, meanwhile, is concerned about a souring political climate with a GNU hobbled by the ANC’s internal faction fights, no longer able to deliver on desperately needed economic reforms.
Growth outlook dims
In February, Treasury was banking on a growth rate of 1.9% for 2025. That was before the shock of Trump’s reciprocal tariffs and the impasse between the two biggest GNU members over the VAT debacle.
Now, everyone has cut their growth forecasts: Standard Bank to 1.3% (from 1.8% previously), the IMF to 1% from 1.5%, while Roodt sees less than 1%.
This is why, says Roodt, “on the current trajectory, I promise a crisis is going to happen. You can’t keep borrowing at this rate and think that the market will keep on funding you”.
There are only two things left to do, as he sees it: cut spending and put bold measures in place to grow the economy. “If you don’t do that, then we are heading for a serious fiscal mess.”
As head of South Africa research at a global bank, Schoeman has a unique insight into how investors view the country. She says the “real money” investors – that is, asset managers with long term horizons of five to 20 years – “are hanging onto this hope that growth is going to rise because of the GNU and because some of the reforms have been ticked off the list so far”. But, she says, we need to establish a track record “quickly”.
The short-term buyers of debt looking to score a quick buck on our incredibly high real yields – more than 7% if you consider that inflation is at 3% and bond yields at more than 10% – are still here for the fun times, but not for a long time.
“Ever since we got kicked out of the world government bond index [in 2020, following South Africa’s downgrade to junk status by ratings agencies Moody’s Investors Service and S&P Global Ratings], we now attract a far more speculative bunch – like hedge funds,” she explains.
“The steeper our yields, the more it attracts speculative investment. That explains why we have so much volatility in the currency,” says Schoeman.
But she worries that this is an artificial signal of demand “because it suggests to [the] government that they’re not doing something too bad because there’s still investment coming in”.
What it isn’t, is real investment: companies ploughing money into factories or projects or personnel. Those investors are still very much on the sidelines. “No shareholder is going to allow them to do a massive capex outlay if there isn’t some certainty of a return on investment,” she says.
For both Schoeman and Roodt, this is why a belief in South Africa’s willingness to change tack and improve growth is so crucial. Business sentiment, which recovered in the second half of last year following the formation of the GNU only to stall in the first three months of this year, is a strong indicator of where the economy is headed.
“If confidence doesn’t rise,” says Schoeman, “then there’s no reason to expect better growth.”
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