A debt crisis is avoidable if steps are taken to tackle the trajectory of borrowing
In the wake of the gloomy numbers contained in finance minister Tito Mboweni’s medium-term budget policy statement , there is increasing concern among investors that SA will have to turn to the IMF for a bailout to fund the country’s growing debt levels.
Investors and the global credit ratings agencies were disappointed by Mboweni’s failure to show a clear path towards reducing debt levels over the next three years in the face of still sluggish GDP growth and high spending requirements. It also increased the likelihood of downgrades to come, a fact subsequently confirmed in the responses of Moody’s Investors Service and S&P Global Ratings, where they noted the deterioration and potential for further downgrades if no action is taken.
If we look at Argentina, which received its most recent IMF bailout just over a year ago, the country’s debt-GDP ratio had risen to 60%, but importantly a high proportion of this was held offshore. Also, inflation had risen to 50% and the peso had depreciated significantly. Consequently, the government had difficulty repaying its hard currency debts and the IMF had to step in to help. Many IMF bailouts in the past have occurred under similar conditions, such as Russia in 1997 and Ghana in 2015.
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