The chickens are coming home to roost. Over the past few years, SA’s budget balance has improved, but more recently, it’s gone sharply into reverse. As a result, long-dated bond values have worsened markedly.

Economists are now expecting that instead of stabilising, SA’s debt-to-GDP ratio is likely to increase. Funny how that always seems to happen.

In February, Finance Minister Enoch Godongwana announced a significant improvement in the government’s debt-to-GDP projections and fiscal deficits. At that point, over the medium term, gross debt was projected to stabilise at 75.1% of GDP in 2024/25, compared with previous projections of a 78.1% peak in 2025/26. The improvement was a major reason Moody’s changed SA from a negative outlook to a stable one.

The budget deficit — the amount of money the government spends that it doesn’t have — widened dramatically during the pandemic period, as it did generally for governments all over the world. At one point, it was more than 10% of GDP in SA. But the predicted budget deficit narrowed to 4.5% of GDP over the last fiscal year. And, for the first time since 2009, the primary budget — revenue minus expenditure without counting debt repayments — was budgeted to return to balance.

But, apparently, that’s all coming rapidly undone. Jason Tuvey, deputy chief emerging markets economist with Capital Economics, said in a note to clients that on a 12-month sum basis, the headline budget deficit widened to nearly 5% of GDP in May. Rather than a surplus of 0.9% of GDP in the current fiscal year as targeted, a deficit of about 1% of GDP seems more credible, he says.

And the pressures are unlikely to decline, with a tightly contested election due next year. The government has already agreed to a 7.5% wage increase for public sector workers, which was not fully incorporated into February’s budget projections, Tuvey notes. According to the Treasury, that will push spending up by R37.4-billion. The government has also extended the R350/month Covid-19 relief grant for another year.

Presumably, the government is also struggling on the income side because companies have had to take evasive measures to avoid load shedding, which has reduced corporate profits. Load shedding itself is a profit killer, and therefore a tax killer.

But, according to Tuvey, the big problem is that interest rate increases have begun to make a meaningful impact on government finances. 

“If the budget position deteriorates further, the path to stabilising public debt will be precariously narrow,” Tuvey wrote. This was all released last month — but now the markets have begun to notice.

The depressing thing about all of this is that it just feels so predictable: the ANC has lost its knack for keeping government expenditure under control. Some predicted the Ramaphosa government would return the country to fiscal responsibility. But it hasn’t. DM