Bulging government gobbles domestic savings

Johannesburg - Government absorbs a significant proportion of domestic savings, according to Saijil Singh, lead analyst of international credit insurer Coface.

In his view the growing remuneration of public sector employees, which initially boosted consumption and promoted growth, has been temporary benefits which proved to be unsustainable.

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Given an infrastructure backlog, inadequate education systems and poisonous labour relations, South Africa faces huge problems that he said will take years to fix.

"An economy continually adjusts to new realities. Given the inflexibility of the economy, the rand exchange rate has to bear the brunt of this adjustment process," explained Singh.

"What is most concerning is that we cannot count on a recovery in commodity prices any time soon. Commodity price booms, such as the one we have recently enjoyed, are infrequent events. New ideas and actions, soundly based on economic realities, are needed to generate the higher growth rate SA desperately needs."

South Africa finds itself in a situation where increasing export revenues is a necessity for sustainable growth, according to Singh.

The increased domestic spending between 2004 and 2007 was only possible because of a commodity boom.

This was reinforced by the fact that, as a result of the growth, employment and redistribution strategy and fiscal deficits were well contained and government did not crowd the private sector out of debt markets.

South Africa’s limited pool of savings could be fully dedicated to supporting economic growth.

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"These conditions, which were favourable for growth, have now been reversed. Following the crisis of 2008, government revenues contracted," said Singh.

"The current government administration does not have the same resolve that the Mbeki administration had to keep spending under control. The number of government employees and their salaries have increased significantly."

South Africa has become locked in a cycle in which fiscal deficits have averaged about 5% of gross domestic product (GDP).

Since 2012, declining export revenues have taken their toll. A rising current account deficit has weakened the rand, eroding real personal incomes and mining investment has contracted.  

These economic distresses are most clearly manifest in SA’s large current account deficit, currently 6% of GDP.

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