Dynamic relationship between public debt and economic growth in South Africa: Insights from threshold analysis

Abstract

The common theme that most developing countries struggle with is the issue of debt management. The ability of a country to maintain its debt levels stands them good in the global economic market. Reasonable debt management makes it easier to attract foreign direct investment, as the risk for an economic collapse becomes low. This study investigated the dynamic relationship between public debt and economic growth, specifically in the South African economy during the period 1990 to 2022. It examined this relationship on the macroeconomic scale, and in the three main growth sectors of agriculture, mining and manufacturing. Moreover, it explored both the linear relationship and threshold relationship. To achieve the objectives of this study, the twostage least squares regression model and the threshold autoregressive regression models were employed. The variables used to achieve the objectives are GDP per capita, public debt as a percentage of GDP, gross value-added manufacturing, gross value-added mining, gross value-added agriculture, average output labour ratio, average output capital ratio, gross fixed capital formation, gross fixed capital formation manufacturing, gross fixed capital formation mining and gross fixed capital formation agriculture. The results of the first model, two-stage least squares regression, reveal a positive relationship between public debt and economic growth in the overall economy. This result is not statistically significant and cannot be taken on face value. The agricultural sector, the mining sector as well as the manufacturing sector all showed a negative relationship between public debt and economic growth. The second model that gave the empirical results, the threshold autoregressive regime, examined the economic growth and public debt nexus through the lense of different thresholds, or regimes. The first threshold is when the economic growth is less than 1.6%. The result reveal that at low or negative economic growth, the high levels of public debt have adverse effects on the economic growth. The second threshold is when the economic growth is less than zero but greater than -1.6%. The results reveal that even though government debt had an effect on economic growth, it is not statistically significant, therefore the impact is weak and not robust enough to draw a strong conclusion. The third threshold is the effect of public debt on economic growth when the GDP per capita is less than 3.4% but greater than zero percent. Here, the negative relationship between public debt and growth continues to be weaker and weaker. It also remains statistically insignificant. The overall result indicates that in moderate-growth conditions, public debt has a minimal impact on economic growth of South Africa. Finally, the fourth threshold is how debt affects economic growth when the growth is strong and above 3.4%. The result reveals that the negative effect attributed by the coefficient of - 0.0037 is statistically insignificant. This, therefore, has the implication that the robust economic performance may mitigate the adverse effects of public debt on the economic growth of South Africa. In the different sectors the results of the last model, the threshold autoregressive regression, show that in the agricultural sector public debt has little to no impact on the agricultural growth sector in lower productivity regimes (1-3) but exhibits a significant negative impact at higher productivity levels (regime 4). In the manufacturing sector the model shows that a nonlinear relationship between public debt and manufacturing growth exists, with the effects varying across different gross value-added regimes. The study demonstrates that public debt negatively impacts growth in low and high manufacturing growth regimes, while potentially promoting growth in intermediate regimes. It is therefore, recommended that South Africa implement debt management tools and uses other measures to generate government revenue and create a stable growing economy.