Within a short period the coronavirus pandemic has become the greatest economic shock for at least a century. Lockdowns motivated by public health considerations have caused a shock of uniquely adverse depth and reach in SA and elsewhere.
A large proportion of firms face liquidity and even solvency risk, while millions of South Africans face unemployment. The situation calls for strong and appropriate government action, with all the tools at the government’s disposal: fiscal and monetary policies, as well as industrial and labour policies. Our concern in this article is with fiscal policy.
This debt ratio results from the interplay of three factors: the primary budget deficit , the growth of the tax base, and the real interest rate on government debt. A decade of large primary deficits is one of the major causes of the country’s rising debt ratio, along with weak real economic growth that constrained the tax base over the same period.
While these yields have since pulled back from panic-driven highs in excess of 13%, the new normal will almost certainly involve higher debt-servicing costs, with 10-year bond yields in excess of 10%. With low inflation, this means the government will have to finance new debt at real interest rates of 5%-6%. If the tax base grows at a slower rate than the real interest rate, the debt ratio will rise without other compensating factors. The BER now expects real GDP to contract 9.
That would include the State have at least 50% stake in Mining Companies.
This is rich. They are the ones causing the debt trap.