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Interview starts at 7:17
Jeremy Maggs: Now, leaving the economy alone, my next guest wrote over the weekend that over the past 10 years, the interest rate that South Africa has been paying on its debt has consistently exceeded the rate of economic growth. Mathematically speaking, this means that debt will increase relative to GDP, creating a vicious cycle, he said.
Let me introduce you to our principal, Roy Haveman. [of] Financial sector policy and public economy at policy advisory firm Kulsum [formerly Intellidex], and is also part of Southern Africa – Towards Inclusive Economic Development (SA-TIED). This is a program designed to support policy development in the broader Southern Africa region.
Roy was very warm and welcoming. So how do you assess the impact on debt of South Africa's interest rates, which, as I said, consistently outpace economic growth? Where are your main concerns?
Roy Haveman: Ja, Hi Jeremy, Thank you. I would like to reflect on what Annabelle Bishop has explained much more eloquently than I can. What is clear is that economic growth in South Africa is currently very weak. I think it has stopped correctly.
Read: SA avoids recession as mining sector recovers
When you think about the impact that will have on South Africa's debt trajectory, two things clearly happen. First, the denominator of the debt-to-GDP ratio worsens because GDP does not rise.
Secondly, the economy is not doing particularly well, so Treasury does not collect any additional revenue and neither does SARS (South African Revenue Service).
As a result, the debt-to-GDP ratio will continue to rise. This makes fiscal consolidation increasingly difficult. Obviously, foreign investors want higher interest rates for this risk and want to pay more and more interest on our debt. So, like you said, we end up in this vicious cycle.
Jeremy Maggs: So, Roy, what are the main difficulties or challenges to breaking out of that cycle? How difficult is it?
Roy Haveman: Well, the “easiest” way, of course, and I say simply with inverted commas, is to increase economic growth. Because then obviously everything will be much better and your income will increase. But we know it's a particularly big challenge. Economic reforms have taken a long time to materialize, and in some ways the Treasury has found itself in a situation where it has had to make significant spending cuts. I think they were fully aware of this and did the right thing under the circumstances. It is as follows:
The first thing you have to do is run what's called a primary surplus, which means you have to bring in more revenue each year than your non-interest expenses, which chip away at this ever-growing mountain of debt. Helpful.
Jeremy Maggs: So how difficult is it to target a primary surplus? Where to start and where to reduce, with a particular focus on stabilizing public debt?
Roy Haveman: that's right. So I think this is a terrible choice currently facing the Treasury in terms of having to cut service provision in order to achieve a sustainable fiscal position. Of course, you should first start with the easiest thing to cut, and perhaps the one you don't need.
Read/Listen: Treasury explains why fiscal stability is key to growth
I think Annabelle Bishop has pointed out the need for reform of state-owned bodies to reduce the costs they incur to us each year. The last thing to be cut is obviously front-line services. I think there is still a lot of efficiency in this system, and a lot of waste. And, of course, the other part is to keep the wage bill in check, and I think the Treasury is working very hard on this. has been implemented with some success.
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Jeremy Maggs: But election years are very, very difficult, right?
Roy Haveman: absolutely. Election years are times when you want to spend as much time as possible. But this is a case where too much spending comes out the other side and actually makes economic growth worse. Of course, because debt levels have increased significantly.
Jeremy Maggs: This is all a philosophical discussion as well, Roy, I would argue. Because even though we have a clear fiscal strategy and debt stabilization efforts, we still don't seem to be able to get out of the starting blocks.
Roy Haveman: Yes, I think the Treasury has communicated many times that they want to stabilize the debt, but I think this growth issue is holding them back. I think it's really good that this conversation happened right after the conversation[with Annabelle Bishop]. Because if the economic growth rate is zero, it is very difficult for the Treasury to make significant fiscal advances. Because there is no further growth. When money comes in as income, you are left with very difficult choices.
For example, we found that there was no remedy for bracket creep. This means that virtually everyone is taxed. That also has negative consequences, obviously reducing consumer spending, so you're stuck (in stores).
Read: No inflation relief for taxpayers
Jeremy Maggs: So if this interest rate and debt trajectory continues, what do you read into it?
Roy Haveman: Well, the debt-to-GDP ratio continues to rise more and more slowly, and has continued to rise over a period of time, and I think it's really putting us in a situation where we're sleepwalking into a potential fiscal crisis. Masu. We have certainly seen that happen in other countries where debt has increased over a long period of time and nothing has been done about it. Then, all of a sudden, you are no longer able to meet your borrowing requirements, and the consequences are very serious. Structural adjustment programs that are difficult and often imposed by the IMF (International Monetary Fund). I'm sure I've seen it in other countries as well.
Jeremy Maggs: And as we are already beginning to demonstrate, FDI (foreign direct investment) is just starting to dry up.
Roy Haveman: absolutely. Therefore, interest rates rise as more and more money needs to be borrowed, making investment much less attractive as people cannot borrow this money at lower interest rates. Therefore, the revenue that must be generated to meet these interest requirements is higher, which becomes a self-fulfilling prophecy. The necessary way to overcome this situation is to put in place financial rules to get your finances back on track.
Read: South Africa urgently needs a debt ceiling
Jeremy Maggs: Roy, I'd like to say it was a pleasure talking to you, but I'd be lying. But thank you for your very insightful insight. I'll definitely be talking to you again. thank you.