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Is a default in the cards for South Africa?

The recent midterm review of South Africa’s fiscal policy by the National Treasury has sketched a bleak portrait of the nation’s financial well-being. Think of it as more of a “hold onto your seats” moment. Here, we break down the top 4 critical points you need to know.


  1. Economic growth limbo: first up, the economic growth outlook isn’t exactly a shining star. South Africa’s got some hurdles to clear, like not having enough electricity, freight rail capacity issues, and a global economic vibe that’s not doing it any favours. So, don’t expect fireworks on the growth front; it’s looking rather meh.
  2. Piggy bank troubles: Now, about the money. Revenue prospects aren’t looking as rosy as expected. Tax collections are playing hard to get, and the major tax bases aren’t being very cooperative. The bottom line? The government’s piggy bank is coming up short, and it’s happening for a while. Tax revenue collection is projected to fall short of 2023 Budget estimates by R56.8bn in 2023/24 and R121.4bn between 2024/25 and 2025/26, with tax buoyancies generally lower over the medium term.
    3. Unwillingness to make hard choices: Speaking of the government, it seems they’re not too keen on slashing expenses to balance the budget. Sure, they’re throwing around some ideas to cut back, but it’s unclear if it’s enough to steer clear of a financial cliff.
    4. Debt drama: Combine all this, and you’ve got a recipe for a debt disaster. South Africa needs to borrow a massive chunk of change (R500bn) every year just to cover its growing deficit and pay off old debts. That’s like borrowing two billion bucks every single workday!

Now, here’s the big question: Could a default be on the horizon? There’s been a lot of talk, but let’s look at a few facts:

  • Governments often rely on borrowing to pay off their maturing debts, and if investors aren’t interested, things can get dicey. But South Africa isn’t there just yet; recent bond auctions have shown strong interest from investors. The bid-to-cover ratio in the latest auction averaged 2.61, which is a healthy sign. In simple terms, it means bids received were 2.61 times the nominal value of bonds on offer.
  • If the governments can not find takers for their bonds, they might consider monetisation. But here’s the twist—unlike some countries (like the US, where the Treasury can just print more money), South Africa’s Reserve Bank is the sole authority when it comes to money printing. Therefore, the National Treasury will have to sell its bonds to the Reserve Bank to raise money to meet its obligations. And as we know, the Reserve Bank isn’t a pushover; it can choose not to get involved, potentially leaving the government in a tough spot. So, the idea of printing money as a safety net for SA bonds isn’t straightforward.
  • But even if the Reserve Bank does decide to buy government debt, it could lead to a worse outcome than an actual default. Think “hyperinflation,” where your money becomes worth less than Monopoly money.
  • But here’s the good news: there are other options besides printing money, like seeking assistance from the IMF or restructuring debt.

Source: National Treasury

The bottom line is South Africa faces some substantial financial challenges, and finding the right strategy to come out on top won’t be easy. While a default isn’t looming on the immediate horizon, it’s not entirely impossible, even for ZAR debt. Investors should also keep an eye on risks like inflation, interest rates, and liquidity.

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