You can also listen to this podcast on iono.fm here.
ADVERTISEMENT
CONTINUE READING BELOW
JEREMY MAGGS: All right, let’s stay with the economy and our next guest writing at the weekend that over the past decade, the interest rate that South Africa pays on its debt has consistently been above the economic growth rate. Mathematically, he says, this means that debt grows as a percentage of GDP, and it becomes a vicious circle.
I’m going to introduce you now to Roy Havemann, who is principal [of] financial sector policy and public economics at the policy and advisory firm Krutham [formerly Intellidex], and also part of Southern Africa – Towards Inclusive Economic Development (SA-TIED). That’s a programme intended to support policymaking in the broader Southern African region.
Roy, a very warm welcome to you. So how do you assess then the impact of South Africa’s interest rate on debt being, as I said, consistently above economic growth? Where is your principal concern?
ROY HAVEMANN: Ja, good afternoon, Jeremy, and thank you very much. I think just to build on what Annabel Bishop has just much more eloquently explained than me, which is obviously the economic growth in South Africa is currently very weak. I think correctly it has stalled.
Read: SA averts recession as mining sector rebounds
If you think about the consequence of that on the debt trajectory for South Africa, very obviously there are two things that happen. Firstly, the denominator on debt-to-GDP gets worse because GDP doesn’t rise.
Secondly, the Treasury doesn’t collect additional revenue or Sars (South African Revenue Service) doesn’t collect additional revenue because the economy isn’t doing particularly well.
Then the consequence of this, of course, is that debt-to-GDP continues to rise and rise and rise. This makes fiscal consolidation more and more difficult. Obviously, foreign investors want to pay more and more interest on our debt because they want a higher interest rate for this risk. So we get trapped in this vicious cycle, as you said.
JEREMY MAGGS: What are the main difficulties or challenges then, Roy, to try and break out of that cycle? How difficult is it?
ROY HAVEMANN: Well, the “easiest” way, and I say easy in inverted commas, is of course to raise economic growth because then obviously everything gets a lot better, revenues rise and so on. But we know that that has been a particularly big challenge. Economic reform has taken quite a long time to deliver, and so the Treasury is, in a way, stuck in having to reduce expenditure significantly. I think they’re very well aware of this and they’ve done the right thing under the circumstances, which is:
The first thing you need to do is run what’s called a primary surplus, so you have to bring in more revenue every year than your non-interest expenditure, and that helps you just chip away at this growing debt pile.
JEREMY MAGGS: So how difficult then is it to target that primary surplus? Where do you start and where do you cut, particularly with the focus on being the stabilisation of public debt?
ROY HAVEMANN: Exactly. So I think this is a terrible choice that now faces the Treasury in terms of having to cut back on service delivery to deliver a sustainable fiscal position. You must first, of course, start with the things that are easiest to cut, perhaps the things we don’t need.
Read/listen: Treasury on why stabilising public finances is key for growth
I think Annabel Bishop put her finger on the need for state-owned entity reform, reducing the cost that these state-owned entities cost us every year. The last thing you should cut is obviously frontline services. There are still a lot of efficiencies you can get in the system, I think there’s a lot of wastage, and, of course, the other part is to keep the wage bill under control, which I think that the Treasury has been trying very hard to do and has had some success with.
ADVERTISEMENT
CONTINUE READING BELOW
JEREMY MAGGS: But very, very difficult in an election year, isn’t it?
ROY HAVEMANN: Absolutely. Election years are the time when you want to spend as much as possible. But it is a case of if you spend too much and then you come out the other side and actually economic growth is even worse because, of course, the debt levels have risen so significantly.
JEREMY MAGGS: All of this is a philosophical argument as well, Roy, I would contend, because we do have a clear fiscal strategy, there is a commitment to stabilising debt, yet we don’t seem to be able to get out of the starting block.
ROY HAVEMANN: Yes, I think that the Treasury has communicated on a number of occasions that they really would like to stabilise debt and I think they are hamstrung by this growth problem. I think it’s really good that this conversation comes directly after the one you just had (with Annabel Bishop) because if the economy is growing at zero, then it’s very difficult for the Treasury to make any major fiscal advances because there simply isn’t more money coming into revenue and you’re left with very difficult choices.
For example, we saw that there wasn’t any relief for bracket creep, which means that taxes effectively go up on everyone. That also has bad consequences, obviously reducing consumption expenditure, and so you get stuck in (store).
Read: No inflation relief for taxpayers
JEREMY MAGGS: So if this interest-debt trajectory continues, then what do you read into it?
ROY HAVEMANN: Well, I think that debt-to-GDP continues to rise slower and slower, continues to rise over a period of time, and it just becomes a case of we’re sleep-walking into a potential fiscal crunch. We’ve certainly seen that happen in other countries where over a long period of time, debt has risen and nothing has been done about it, and suddenly, you’re just unable to finance your borrowing requirement and the consequence of that is a very difficult, often IMF (International Monetary Fund) imposed structural adjustment programme. Certainly, things we’ve seen in other countries.
JEREMY MAGGS: And as we are already starting to evidence, FDI (foreign direct investment) just starts to dry up.
ROY HAVEMANN: Absolutely. So interest rates rise because you need to borrow more and more money, and that makes investment a lot less attractive because people can’t borrow this money at lower interest rates. So the return on their return that they have to generate to meet these interest requirements are higher, and that becomes a self-fulfilling prophecy. The way you need to break it is to get a fiscal rule in place to bring and to haul the fiscal position back on track.
Read: South Africa urgently needs a debt ceiling
JEREMY MAGGS: Roy, I wish I could say I’ve enjoyed talking to you, but I’d be lying. But thank you very much for the very insightful insight, and no doubt we will talk again. Thank you.
