SA doesn’t have a debt problem. It has a growth problem — and a solution
SA’s close on R4-trillion debt mountain seems so scary that it often blinds us to our real problem and solution: economic growth.
Whether it is expanding social welfare support to stimulate economic demand, as most nations have done in response to the pandemic, or supporting a concessional green energy refinancing of Eskom’s debt, many of SA’s policymakers and business leaders’ knee-jerk reaction is to recoil out of fear for what each means for our debt.
Instead they should ask what these measures promise for economic growth.
China and the US both have higher public-debt-to-GDP ratios than SA’s, recently rebased at 71%, though rising. SA’s debt ratios are, actually, in line with emerging-market peers.
Our economy, at R5.5-trillion, is 62 times smaller than the US’s, and 40 times smaller than China’s. So, how are they managing their much, much larger debt stack while pumping up their economies? Simply, aided by stimulus, by growing their economies faster than their rising cost of debt.
Their debt-to-GDP ratio shrinks as GDP climbs, and markets price in confidence that the massive debt will be repaid.
If you observed the US and China’s top officials this week, you would have seen how both countries, despite stresses, maintain this confidence by masterfully applying the accelerator or the brake to achieve their bold economic plans.
I get it: paying almost R1bn per day just to service our debt in SA seems scary. And yes, we have a much higher cost of debt, and there’s no question that we need to keep it under tight control.
But our real problem is growth. In the past decade SA’s economy has grown at under 1%, and, excluding 2020’s nightmare, only 1.5%. Since 2014, we have recorded zero growth (excluding 2020, only 1%).
That is a shocking track record, a crisis of growth, and turning it around must be our focus. By contrast, China through the past decade averaged 6.9% GDP growth rates, and the US 1.7%, including 2020. As our debt has increased while GDP stagnated since 2011, our debt-to-GDP, poverty and unemployment rates skyrocketed.
That is the legacy of an abysmal economic growth track record. Many understandable reasons can be offered, but excuses don’t help us now. SA now has wind at our backs globally.
The commodity cycle is not a flash in the pan, a mere post-pandemic bounce-back. It is a secular, long-term response to refitting and re-engineering the global economy for climate change. An overhaul of global investment, led by the US and China, is taking place in technology, energy and industry.
SA doesn’t need to see fantastical growth rates to achieve lower borrowing costs, but should target and achieve modest 2.5%-3% growth rates to restore market credibility
This will prove a major opportunity for commodity exporting economies like SA. The commodity boom should provide us with the five-year fiscal dividends we need to stimulate and grow the economy, while servicing and winning our war on debt.
A future restructured energy mix also provides SA with an exciting and sizeable opportunity for fixed investment. When growth goes up, borrowing costs come down.
SA doesn’t need to see fantastical growth rates to achieve lower borrowing costs, but should target and achieve modest 2.5%-3% growth rates to restore market credibility. That will restore confidence that in the medium term we can turn the tide on our war on debt.
With it the cost of debt should come down. So, what are the keys to unlocking greater rates of growth? Two areas, beyond the standard diet of structural reforms, I want to highlight.
First, a stimulus targeting the unemployed and small businesses to help this large, marginalised section of our economy bounce back. Second, we need to improve our competitiveness, productivity and cost of doing business, thereby enhancing net returns for capital providers investing here.
The compounding costs of regulatory overreach, barriers on skills, labour rigidity, empowerment ownership transfers, relative costs of levies and taxes, inefficiencies of our state companies, municipalities, high-cost public sector and expensive logistics; not to mention the hidden costs of corruption, crime and waste, have produced an environment where returns on capital in SA have sharply declined, hurting corporate margins and SA’s attractiveness to investors.
We can’t attract investors, and overly burden them at the same time. To attract higher rates of domestic private fixed investment we need to offer higher predictable returns on capital employed.
We need smarter regulation, we need to lower the friction costs on investing and employing South Africans, and we need an entrepreneurial and capable state to unlock private sector investment.
We need a developmental state that provides the economic backbone infrastructure, human development services and social safety net. One that is neither bloated nor overreaching. And we need an innovative, patriotic business sector.
I have echoed the voices of countless others in civil society calling for income support for the 12-million unemployed. I have proposed a grant of R800 per month, costing R115bn a year.
That investment will be spent in the South African economy on food, clothing and essentials. And help the poor start informal micro businesses employing millions. Detractors offer only non-cash solutions, such as training and other support, of little immediate value to the jobless.
However, if we keep turning all the growth and stimulus taps off, out of fear that debt will overwhelm us, it most likely will overwhelm us
I have also called for a stimulus for businesses via a hybrid equity instrument to help recapitalise businesses to bounce back from the pandemic. A wage subsidy could be an added stimulus to jobs.
With such a stimulus package and a smart reset of the environment for investment, a genuine partnership between the state, private capital and civil society may be possible, and begin to turn the tide on our growth, jobs and income inequality crisis.
However, if we keep turning all the growth and stimulus taps off, out of fear that debt will overwhelm us, it most likely will overwhelm us.
And our Mandela-inspired dreams will expire, breathing fire onto an already barely recognisable anti-poor society that treats our unemployed and marginalised with cruelty, that executes councillors in mafia-style killings, a racially and ethnically mobilised populace.
An ugly country that we all recoil from in horror. We saw the signs in July with the looting, burning and racial polarisation. It will likely get worse with each future episode. The spectre of a debt crisis is tame in comparison.
To keep Mandela’s dreams alive we must rediscover our unity as a nation, our nonracialism, our love for democracy and the rule of law. We must mobilise the best talent to the heart of the economic machinery.
Black and white. We must take calculated risks to get growth moving. Borrowing from Bill Clinton’s slogan “It’s the economy, stupid!”, perhaps our mantra in SA should be “It’s economic growth, stupid!”. If we don’t grow, there will be nothing to share, no nation to transform, and our national debt will be the least of our problems.
We may not agree about how to grow, but let’s agree to put growth, not debt, at the centre of our solutions.
• Coleman is a former CEO of Goldman Sachs, Sub-Saharan Africa, a former senior fellow and lecturer at Yale University, a member of boards, and co-chair of the Youth Employment Service. This is an edited version of a speech he delivered this week at the National Investment Dialogue sponsored by Absa and the Sunday Times.
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