South Africa’s economic performance remains fragile. GDP growth estimates for 2019 and 2020 have been systematically revised lower, there is continued uncertainty about the planned restructuring of SAA and Eskom, Moody’s will most likely downgrade SA’s international credit rating to below investment grade in early 2020, there is growing evidence of increased distress borrowing at a household level, and business and consumer confidence remains subdued.

At the start of the final month of 2019 it is clear that South Africa’s economic performance remains disappointing and the economy appears unable to gain any momentum given the weak business confidence, slowing household income, high and rising government debt, the ongoing risk of intermittent electricity supply, and a weak labour market. Consequently, the South African economy is expected average growth of only 0.5% in 2019, rising modestly to 0.8% in 2020. This is well below the rate of growth in the population, implying a further decline in the country’s average income per person.

The medium-term budget policy statement (MTBPS), presented in October 2019, provided a sobering but realistic assessment of government finances, especially the rapid and unmitigated deterioration in key fiscal parameters during recent years. More importantly, it revealed South Africa is heading towards a debt trap and a credit rating downgrade in the first half of 2020 unless significant changes occur.

The systematic deterioration in South Africa’s fiscal position largely reflects the combined effect of three major constraints, namely a fall-off in tax revenue, the provision of significant additional finance to support many of the SOEs including Eskom, and inefficient spending by many government departments. As a result of these three constraints government debt has risen from a low of 26% of GDP in 2009 (at the time Moody’s had assigned South Africa an ‘A’ credit rating), to an estimated 60.8% of GDP in 2019/2020 and is expected to rise to over 70% of GDP within the next three years. This means that in value terms, over the past three fiscal years, government debt will have risen by a massive R934 billion, equivalent to R25.9 billion a month, or an average of around R1.1 billion each working day. Given the sharp fiscal deterioration it is unsurprising that Moody’s Investors Service as well as Standards and Poor’s decided to revise South Africa’s credit rating outlook from stable to negative.

This increase in debt is especially damning considering the deterioration in South Africa’s socio-economic conditions, especially sustained low economic growth, record high unemployment, a record low savings rate, systematic downward revisions to the credit rating, regular electricity outages, a fragile water supply, the deterioration in public sector health and poor education outcomes.

Overall, it is hard to argue against the concerns raised by both S&P and Moody’s. Furthermore, the Reserve Bank has highlighted on numerous occasions that the current challenges facing the South African economy are primarily structural. Implementation of prudent macroeconomic policies together with structural reforms that raise potential growth and lower the cost structure of the economy are, therefore, urgently required.