Debt sustainability and financial crises in South Africa

Abstract

In this study, we use a long historical data series to assess debt sustainability in South Africa allowing for possible nonlinearities in the form of threshold behavior by fiscal authorities conditional on the recent history of indebtedness and the occurrence of financial crises. First, the results reveal that fiscal consolidation is maintained when a debt-to-GDP ratio of around 56 percent is reached with evidence of a statistically insignificant fiscal consolidation below this threshold level. Second, the results reveal that fiscal adjustment takes into account past levels of debt to allow for smoother corrective action. Third, fiscal consolidation occurs at a higher debt-to-GDP ratio during financial crises.