Record outflows reshape South Africa’s debt

This year’s global debt figures show developing economies are bleeding capital on a scale not seen in 50 years. Receding inflation and tentative rate cuts have allowed some emerging economies to tiptoe back into international bond markets at more sustainable prices. But for most low- and middle-income countries (LMICs), these modest gains barely register against the scale of the financial strain.

According to the World Bank’s International Debt Report 2024, between 2022 and 2024, LMICs paid $741bn more in principal and interest than they received in new financing — the largest negative net transfer of resources in at least half a century.

South Africa is squarely part of this global reversal. The country recorded a net financial outflow (debt and equity) of more than $5.4bn in 2023. While peers across the developing world remain burdened by foreign currency liabilities, South Africa’s latest data shows a marked contraction in private sector external debt. Total external debt stocks fell to $165.7bn in 2023, driven by a reduction of about $3bn in corporate and banking sector borrowing.

But this apparent deleveraging is no fiscal triumph. It represents a rerouting of risk rather than its resolution — a shift from currency exposure to dependence on domestic funding conditions and the fickle confidence of foreign portfolio investors. In effect, South Africa has swapped one vulnerability for another. Lower foreign currency debt reduces balance sheet mismatches, but it deepens reliance on the behaviour of nonresident investors who still hold a crucial share of rand-denominated government debt.

The drivers of this corporate deleveraging are a potent cocktail of global push and local pull factors that made offshore borrowing uneconomical. According to the Reserve Bank, the principal culprit was the global monetary policy tightening cycle, which led to sharply increased interest rates, raising the cost of foreign-currency capital for domestic firms. This was made worse domestically by South Africa’s greylisting by the Financial Action Task Force in February 2023, which the Bank noted raised the cost of capital at the margin.

While South Africa’s external debt metrics are moderate by global standards, at 44% of GNI, the ratio is below the world average of 54.39%

This pressure forced companies to pivot, abandoning expensive foreign credit in favour of domestic funding. The Bank says the primary benefit of this move is the reduced reliance on foreign currency debt, which “reduces the exposure of the domestic financial system to currency mismatches and the exchange rate risks related to such balance sheet mismatches”. By sourcing funding in rand, borrowers are aligning the currency of their assets and liabilities, thereby insulating balance sheets and strengthening systemic resilience.

Crucially, however, the official reduction in external liabilities was also influenced by a one-off technical event. The Bank highlights that the market value of South Africa’s foreign liabilities decreased in the third quarter of 2023, “as a result of the removal of the cross-holding structure between Naspers and Prosus”, which resulted in the removal of Prosus’s shareholding in Naspers. This change was a significant noneconomic accounting event that artificially reduced the recorded external liability figure without representing any actual principal repayment or reduction in South Africa’s real debt burden.

However, the Bank’s analysis pivots quickly to a counter-risk. “There remains a risk that an external shock may induce foreign investors to liquidate their holdings of rand-denominated South African debt instruments or decline to roll over existing debt facilities, which in itself can impose financial stability risks,” the Bank says. The deleveraging simply moved the debt from foreign currency risk to rand-denominated investor confidence risk.

This systemic vulnerability is amplified by the sheer size of the government’s local funding needs and the alarming cost of servicing them. While South Africa’s external debt metrics are moderate by global standards, at 44% of GNI, the ratio is below the world average of 54.39%.

More alarming is the cost of servicing that debt. The debt service cost has surged to more than 5% of GDP in the 2024/2025 fiscal year, reaching an estimated R385.6bn. This cost is rising faster than spending on any other government service, effectively crowding out critical expenditure.

According to the Bank, debt service cost as a share of total government spending now exceeds individual spending on health, economic affairs and housing. The World Bank’s report shows a record 3.4-billion people live in countries that spend more on interest payments than on either health or education.

The Bank is cautiously optimistic, stating that at current levels the domestic exposure “does not pose a material threat to domestic financial stability”. Yet, this stability is predicated entirely on the continued faith of the bond market.

South Africa is in the unenviable position of having reduced its exchange rate vulnerability while simultaneously intensifying its exposure to portfolio flight risk, all against a backdrop of crushing domestic debt service costs.