We are living in interesting times. South Africa has reached a tipping point in its government finances. This comes at a time when the world’s largest economy has passed its tipping point and drastic measures are invoked by the Trump administration to rectify a runaway train fully packed with debt and with a massive trade deficit with the rest of the world on a scale never seen before in the history of mankind. Perhaps his actions may not be described as “too little too late,” but it certainly is well past midnight. Time will tell if he has thrown the baby out with the water. The voters in the USA will be the judge. Currently, there are more and more demonstrations in American Cities.
1. Escalating trade tensions—driven by President Trump’s sweeping 10% tariff on all imports and China’s impending 34% “retaliatory” levy on U.S. goods—have heightened fears of a global recession. The real conflict is economic. It is about trade wars, technological dominance, and controlling key industries. The stock markets in the USA have lost almost 5$5 trillion!
The recent fiasco in finalising a budget for the South African economy has sent an extremely negative message to the financial markets. Interest rate on long bonds increases sharply to 11,21%. In contrast, the long bond rate of the USD is 4,25%, and most first-world countries are lower than that. Third world countries have much higher rates, with Brazil and Russia rates at over 15%.
Price often serves as a proxy for quality. It’s a deeply ingrained psychological association: the higher the price tag, the better the product. This is the same with Bonds; the higher the rate, the lower the price. Conversely, lower prices trigger scepticism. Customers wonder, “What’s the catch?” They may perceive discounted products as inferior, suspecting quality, durability, or performance compromises. Can a person trust an investment that pays 11,20% when similar rates in the USD are at 4,25%?
2. There is more than one interest rate that is of significance to the working person. Short-term interest rates are those rates that apply for terms of less than 12 months. For personal finance purposes, credit cards and bank overdrafts are linked to these rates. There are also medium-term loans, typically for an investment period of between two and seven years. The other interest rate is that which is typically referred to as long term, which can have a term of anything between ten and 30 years. The shorter interest rates are typically used for trade finance or credit loans for shorter periods. However, when it comes to the financing of fixed assets or infrastructure, those loans have longer payback periods. Typically, individuals with home loans will be watching these levels more closely, although the rate is pinned on short-term rates with a premium for the longer-term risk. Consumers in South Africa are also drowning in debt, levels of total debt levels exceeding R2,5 trillion.
The level of interest rates is determined by an open, free market approach. Investors consider the risk associated with the issuer for the loan period, and that would then make a bid for investing in such a loan.
3. Tax revenue collected amounted to R1 740.9 billion, an annual increase of R54.2 billion in the 2023/24 tax year. Of this amount, 25,7% was collected from VAT. In the next few years, the VAT increase will cost the taxpayers at least R17bn per annum. The government will spend R251bn in the coming financial year to cover public-sector wage increases. Tabling his 2024/2025 budget in parliament, Finance Minister Enoch Godongwana said the R251.3bn will be used to fund salaries of civil servants such as teachers, health workers, and the police. Had the government kept public servant salaries at the same level as inflation over the last five years, there would not have been a further burden on the taxpayers.
4. South Africa and the USA are not too dissimilar concerning their economic woes. Both countries are drowning in debt. In South Africa’s case, the debt-to-GDP ratio is substantially lower than that of the USA, i.e., 76% against 125% in the case of the USA. However, interest rates in the USA are substantially lower than those of South Africa, and their interest payment expense is lower as a percentage of their budget than that of us. Taxpayers/voters do not find this acceptable, and a tax revolt is the last thing either country needs.
The sovereign credit rating of the various nations makes for very interesting reading. There are several countries with an AAA rating and a credit score of 100%. They are inter alia, Australia, Denmark, Germany, and Switzerland. The USA comes in at a score of 97% and AA+ + rating. Considering all the tariff war implications, this may be the last time they have such a favorable rating for a long time. South Africa has a credit rating of BB- at 41%. Countries such as Russia and Ukraine come in at 14% and 11% respectively. The lower the score, the less trust is placed in a country to be able to repay its loans and to service the interest. Despite Australia’s strong credit rating, the latest tariff announcement has had a huge effect on its markets. Investors were bracing for a $ 115 billion plunge on Monday, 07/04/2025, as Donald Trump's tariffs stir fears of a global recession, but early losses have already amounted to $187 billion.
5. The United States has the world’s highest national debt, with $30.1 trillion owed to creditors as of the first quarter of 2023. Washington’s debt now stands at $31.4 trillion, raising further concerns about US government spending and borrowing costs. To put that in context, the US owes as much money as the next four countries with the highest debt, including China ($14 trillion), Japan ($10.2 trillion), France ($3.1 trillion), and Italy ($2.9 trillion).
Investors abroad sold longer-term Treasuries for three consecutive months, a sign of central bankers reducing their reliance on the U.S. as a financial buffer. In January, foreigners sold a net $13.3 billion of U.S. notes and bonds that had more than one year to maturity, the latest Treasury data show. It comes after $49.69 billion was sold in December, following sales of $34.41 billion in the month of U.S. elections, November. Global central banks represent a big chunk of foreign demand.
One can safely say the chickens have come home to roost, both in South Africa and the USA. However, before we rejoice in the misery of the USA, it may be good to remember the old African saying. When elephants fight, the grass gets trampled. (meaning that the weak get hurt in conflicts between the powerful) There will be some good news, for instance, the lower growth estimates for the world economy will be reflected in the oil price. International benchmark Brent crude prices declined 7% to $65 per barrel, the lowest level since April 2021.
There are several wars in the Middle East, in the DRC, and Ukraine. However, the real conflict is economic. It is about trade wars, technological dominance, and controlling key industries. Technology changes have created new ways in which work is defined, and every citizen must position him/her for this new reality. Ideology does not put bread on the table, workers must align their skills with the new economy and find a place in the sun that makes a real difference.
* Kruger is an independent analyst.
PERSONAL FINANCE