Reserve Bank Governor Warns South Africa Heading for Serious Financial Trouble: Debt Crisis Threatens to Crowd Out Private Investment and Social Spending

Reserve Bank Governor Lesetja Kganyago has issued a stark warning that South Africa is heading toward serious financial trouble, with the country’s debt trajectory threatening to trigger a fiscal cliff where the economy cannot sustain the government’s debt burden. The warning comes as South Africa faces mounting economic challenges amid stagnating GDP growth and soaring debt-servicing costs.

In a recent speech to the National School of Government, Kganyago outlined the fundamental problem plaguing South Africa’s fiscal health: the interest rate the state pays on its debt is greater than nominal GDP growth, creating an unsustainable dynamic that threatens long-term economic stability.

Build the future you deserve. Get started with our top-tier Online courses: ACCA, HESI A2, ATI TEAS 7, HESI EXIT, NCLEX-RN, NCLEX-PN, and Financial Literacy. Let Serrari Ed guide your path to success. Enroll today.

The Mathematics of Fiscal Crisis

South Africa’s financial predicament can be understood through a simple but devastating equation. With nominal GDP growing at about 5% while the government pays around 10% to borrow over the long term, the country faces what economists call an “r>g” scenario – where the interest rate (r) exceeds growth (g), making borrowing fundamentally unsustainable as debt compounds faster than the income needed to service it.

“If we borrow to pay only interest on existing debt, we open ourselves up to a debt spiral,” Kganyago warned during his address. This scenario represents the core of South Africa’s fiscal challenge, as debt-servicing costs have become the fastest-growing expenditure item in the budget, with the government now spending over R1 billion a day on interest payments.

The Reserve Bank Governor pointed to the country’s steep yield curve, with the 10-year bond yield sitting just below 10% and longer-term bonds commanding even higher rates. “You are asking investors to lock in exposure for decades and endure losses if debt does not stabilise and rates rise further. They are willing to bear that risk – but at a high price,” he explained.

Debt Trajectory Reaches Critical Levels

South Africa’s debt situation has deteriorated dramatically over the past decade and a half. The debt-to-GDP ratio has skyrocketed from 23.6% in 2008/09 to a projected 76.2% in 2024/25, representing one of the fastest debt accumulations among emerging market economies.

The current debt load is expected to continue growing, with national government’s total gross loan debt projected to increase from R5.7 trillion (76.1% of GDP) in fiscal 2024/25 to R6.8 trillion (75.1% of GDP) in fiscal 2027/28. More alarmingly, debt-servicing costs are projected to reach R478.6 billion by 2027/28, translating to R1.3 billion per day.

This trajectory means the government will soon spend more on interest payments than on critical social services. Over the medium-term expenditure framework period, the government expects to spend more on debt-service costs than on health, basic education and social development combined.

Economic Stagnation and Growth Challenges

South Africa’s economic performance has been dismal, contributing significantly to the fiscal crisis. From 1994 to 2022, GDP per capita increased by only 22%, a stark contrast to the 783% growth in China, 337% in Vietnam, and 285% in India over the same period.

The country’s GDP per capita in 2022 was lower than in 2007, and by the end of 2025, the country will have experienced 18 years of declining average living standards. This economic stagnation has created what economists describe as an “unviable country” with record levels of unemployment, poverty, and inequality.

Current unemployment statistics paint a dire picture. South Africa now has the world’s highest unemployment rate, with 8.23 million officially unemployed and another 3.5 million discouraged work-seekers. According to recent quarterly figures, nearly 300,000 people lost their jobs, meaning approximately 5,000 South Africans face unemployment daily.

The Growth versus Stability Debate

Governor Kganyago challenged the common narrative that South Africa faces primarily a growth problem rather than a debt problem, arguing that the two are intrinsically linked. “Unfortunately, rather than considering the macroeconomic mix, we sometimes get stuck debating consolidation versus growth,” he said.

“It is sometimes asserted that South Africa does not have a debt problem; it has a growth problem. No doubt, sustained, high growth could solve our debt problem. But it does not follow that the economy is capable of flourishing in the context of fiscal fragility,” the Governor explained.

The Reserve Bank chief emphasized how South Africa’s growth challenges are endogenous to its fiscal situation. “It is negative for growth to have a high and rising tax burden – especially where the quality of spending is low,” he noted. “It hurts to have high long-term borrowing costs and a sub-investment grade credit rating.”

These factors explain why fiscal multipliers in South Africa are so small – additional government spending produces little or no increase in total economic output, making stimulus-driven growth strategies counterproductive.

Credit Rating Downgrades and Market Confidence

South Africa’s fiscal challenges have been exacerbated by a series of credit rating downgrades that have pushed the country firmly into sub-investment grade territory across all major rating agencies. Moody’s was the last major agency to maintain an investment-grade rating until March 2020, when the COVID-19 pandemic’s impact finally forced a downgrade.

The journey to junk status began in 2017 when S&P and Fitch downgraded South Africa following President Jacob Zuma’s cabinet reshuffle that removed respected Finance Minister Pravin Gordhan. The downgrades reflected concerns about policy continuity and governance standards under the Zuma administration.

By November 2020, both Fitch and Moody’s delivered further downgrades, pushing South Africa deeper into junk status. Moody’s forecasted government debt-to-GDP to rise to 110% by fiscal 2024 when including state-owned enterprise guarantees – representing a 40 percentage point increase from fiscal 2019.

These downgrades have practical consequences beyond reputational damage. They force institutional investors with mandates to hold only investment-grade debt to sell South African bonds, reducing demand and increasing borrowing costs. The higher risk premium demanded by investors translates directly into increased debt-servicing costs for the government.

State-Owned Enterprise Burden

A significant component of South Africa’s fiscal crisis stems from the ongoing support required for struggling state-owned enterprises, particularly Eskom, the national electricity utility. Continuous bailouts and debt guarantees for SOEs have added substantially to government debt and represent a major drag on fiscal resources.

The electricity crisis has broader economic implications beyond direct fiscal costs. Steel giant ArcelorMittal recently announced the closure of its long steel production plant, citing insurmountable challenges including unstable energy supply and deteriorating rail infrastructure managed by Transnet. Eskom’s recent 12.7% electricity price increase for 2025-2026 contributed to this decision, potentially affecting South Africa’s automotive sector.

These infrastructure challenges create a vicious cycle where poor service delivery hampers economic growth, which in turn reduces tax revenue and increases the fiscal burden. The deterioration of ports, railways, and electricity supply constrains private sector productivity and investment, undermining the economic growth needed to address the debt crisis.

Ready to level up your career? Join our expert-led Online courses in ACCA, HESI A2, ATI TEAS 7, HESI EXIT, NCLEX-RN, NCLEX-PN, and Financial Literacy. At Serrari Ed, we turn potential into achievement. Start your journey today!

Political and Budget Challenges

South Africa’s fiscal crisis has been compounded by political disagreements over budget priorities. In an unprecedented development, the country experienced its first budget deadlock in 30 years of democracy when coalition partners failed to agree on budget measures in February 2025.

Finance Minister Enoch Godongwana was forced to unveil a revised budget in March 2025, scaling back proposed VAT increases to a phased implementation. However, the revised budget was also rejected by major political parties, highlighting the difficulty of implementing fiscal consolidation measures in a politically fragmented environment.

The budget impasse reflects deeper challenges in South Africa’s Government of National Unity, where parties spend more time taking each other to court than crafting meaningful reforms. One year since its formation, not a single new economic policy has been introduced, while key industries continue to shed jobs.

Social Spending Pressures

South Africa’s fiscal challenges are complicated by enormous social spending pressures. The government’s “social wage,” which includes social grants, education, healthcare, and housing, makes up 61% of total non-interest spending. This reflects both the country’s high levels of poverty and inequality and the political difficulty of reducing social support during economic hardship.

The Social Relief of Distress (SRD) grant, which provides support to about eight million people, exemplifies this challenge. Originally intended as a temporary COVID-19 measure, the grant has become politically difficult to terminate, adding approximately R36 billion annually to government expenditure.

These social spending pressures create a policy dilemma: reducing social support could worsen poverty and social instability, but maintaining high social spending without corresponding economic growth perpetuates the fiscal crisis.

The Path to Stabilization

Governor Kganyago argued that South Africa’s best approach is “growth through stabilization” rather than attempting expansionary policies that compromise macroeconomic stability. “The best thing we could do for growth, on top of structural reforms, is to deal decisively with the country risk premium. It is not growth or stabilisation; it is growth through stabilisation.”

De-risking the economy would create space to reduce interest rates, boost confidence, and establish a more stable investment environment. “If we can reduce interest rates through permanently lower inflation, and by de-risking, we can finance debt at lower costs,” Kganyago explained.

The potential benefits are substantial: “For a debt stock of R5 trillion, every percentage point you save in interest is worth R50 billion.” This saving would free up billions for more productive government spending, attract investment through reduced risk premiums, and create space for increased private sector borrowing.

International Monetary Fund Assessment

The International Monetary Fund’s 2023 Article IV consultation painted a sobering picture of South Africa’s challenges. The IMF projected the overall fiscal balance to widen to a deficit of about 6.5% of GDP in fiscal year 2023/24, deteriorating further through 2025/26 due to Eskom debt relief operations and continued transfers to loss-making state-owned enterprises.

The IMF noted that “elevated public debt significantly limits the fiscal space available to respond to economic and climate shocks and meet social and developmental needs.” The Fund recommended strengthening the fiscal framework by introducing a debt ceiling and addressing deficiencies in public procurement and investment management.

Structural Reform Imperatives

Addressing South Africa’s fiscal crisis requires more than just budget adjustments – it demands comprehensive structural reforms to boost economic growth and efficiency. The IMF highlighted the need to address “long-standing rigidities in product and labor markets, and governance and corruption vulnerabilities” that constrain growth and employment prospects.

Key reform areas include improving the efficiency of state-owned enterprises, enhancing the business environment, addressing infrastructure bottlenecks, and strengthening governance and anti-corruption efforts. The government’s Operation Vulindlela reform initiative represents progress in some areas, but implementation has been slow and uneven.

Education and skills development are also crucial for long-term growth. South Africa’s high unemployment rate partly reflects a mismatch between educational outcomes and economic needs, requiring reforms to improve educational quality and workforce skills.

Debt Crisis Comparisons and Context

While some analysts argue that claims of South Africa heading toward a fiscal crisis are overstated, pointing out that the country’s debt-to-GDP ratio aligns with emerging market averages, the combination of high borrowing costs, slow growth, and limited fiscal space creates unique vulnerabilities.

The Institute for Economic Justice has argued that South Africa’s debt levels, at 71.4% of GDP in 2022/23, are comparable to the emerging market average of 69%. However, this analysis may underestimate the risks associated with South Africa’s specific circumstances, including political constraints on fiscal adjustment and structural economic challenges.

Looking Ahead: The Urgency of Action

Governor Kganyago’s warning represents more than academic analysis – it reflects the urgent reality facing South Africa’s economic future. Without decisive action to address the debt trajectory, the country risks a scenario where debt servicing consumes an ever-larger share of government resources, crowding out productive investment and social spending.

The solution requires coordinated action across multiple fronts: fiscal consolidation to demonstrate credibility to markets, structural reforms to boost economic growth, and political consensus to implement difficult but necessary changes. Time is running short, as each year of delay makes the eventual adjustment more painful and the risks of a debt crisis more acute.

The Reserve Bank Governor’s message is clear: South Africa cannot continue on its current fiscal trajectory without facing severe economic consequences. The choice facing policymakers is whether to implement controlled adjustment now or risk a more severe crisis that would impose far greater costs on all South Africans.

Ready to take your career to the next level? Join our Online courses: ACCA, HESI A2, ATI TEAS 7 , HESI EXIT  , NCLEX – RN and NCLEX – PN, Financial Literacy!🌟 Dive into a world of opportunities and empower yourself for success. Explore more at Serrari Ed and start your exciting journey today! ✨

Track GDP, Inflation and Central Bank rates for top African markets with Serrari’s comparator tool.

See today’s Treasury bonds and Money market funds movement across financial service providers in Kenya, using Serrari’s comparator tools.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

25th August, 2025