South Africa

Due to a considerable short-term absorption of revenues to repay for interest on debt and an increase in sovereign bond yields to the present level of 7.5% for two-year maturities, South Africa ranks in the worst quintile in our public debt sustainability risk assessment as of end-2022. Conversely, the present inflationary cycle helped to create the largest budget surplus ever between April and December 2022, supporting the trend towards the predicted decline in the fiscal deficit in FY 2022–23. The total deficit for the time period was only 2.8% of GDP, which is a substantial improvement over the past three fiscal years, during which the deficit averaged 5.2% of GDP. The primary contributors to revenue growth were personal income tax (PIT), corporate income tax, local and import VAT, as well as import customs duties. Salary increases and bonuses led to larger PIT inflows, and greater inflation bolstered VAT revenue streams.

Although the level of government debt is still elevated, the ratio is expected to stabilize at little more than 70% of GDP, including government guarantees on state-owned enterprises’ (SOEs) debt. Interest payments are part of the price of the favorable debt structure, which is primarily denominated in local currency and has a lengthy amortization profile on average (12 years). Fiscal consolidation will continue, with increased tax collection and disciplined salary increases providing some flexibility to meet mounting social demands and moderately support SOEs in case of need. Although the country's dependence on foreign capital makes it susceptible to "sudden stops" (a sudden change in investor appetite), the external balance has so far been resilient to shocks. Buffers include a flexible exchange rate, limited external debt in foreign currency and substantial external assets that make South Africa the largest net investor on the continent, with a net position of USD59bn (14% of GDP).

Due to its slow-growing and generally volatile export markets, South Africa has a high import propensity of 28% of GDP, which should keep the country's external accounts in the negative and put pressure on the rand. The rand's value also depends on price discrepancies with the rest of the world, fluctuations in commodity prices, the current account deficit and the amount of foreign reserves. Rand upside pressures include a persistent increase in foreign investor interest in developing economies and upwardly moving commodity prices as global GDP progressively recovers. These factors should buffer the currency's longer-term depreciation trend.