If you open any newspaper these days you’ll see the issue of debt dominating the financial headlines. From government debt in the Eurozone and efforts to balance the US federal budget, world politicians are constantly trying to solve debt issues before they spin out of control, but is South Africa immune to this problem?
SA’s Debt Problems
Many South Africans assume that debt is a problem in Europe and other developed countries, but the truth is that our country has high levels of debt – as a percentage of GDP our debt is even higher than many European nations.
South Africa’s debt situation is the result of our twin deficits – our government currently runs a fiscal deficit and we have a current account deficit too.
The Twin Deficits
The fiscal deficit occurs because the government is currently spending more than it collects in taxes, while the current account deficit occurs because more money leaves the country each month than enters it – mainly because we import more as a nation than we export. These deficits make South Africa a debtor to other nations.
The twin deficits place us at number three in the world (after Greece and the US) when debt as a percentage of GDP is calculated. Considering that, unlike the other two countries, South Africa is a developing nation our levels of debt is worrying to many experts.
Slide Courtesy of Coronation Fund Managers
Household Debt
With twin deficits at national level, are South African households still safe when it comes to personal debt? Many experts say no.
According to the South African Reserve Bank, household debt as a percentage of disposable income sits at 76% – this indicates a highly indebted nation. However, some good news is that the level of household debt has reduced somewhat since 2008 when it was at 80% of disposable income.
Coupled with high household debt is an extremely low savings rate – as low as 1% according to recent reports. With the South African government and its people racking up more debt each year, the value of the Rand could fall in the long term, creating nagging inflation which could reduce spending power and result in even higher debt in future.