Assessing the impact of fiscal consolidation uncertainty on South Africa’s foreign debt

Purpose This study aims to investigate the impact of fiscal consolidation uncertainty on South Africa’s total foreign debt from the first quarter of 1960 to the third quarter of 2022. It seeks to fill a gap in the literature by analyzing how uncertainty in government budget indicators influences foreign debt dynamics. Design/methodology/approach To achieve this objective, the study employs time-varying conditional autoregressive (ARCH), generalized autoregressive conditional heteroskedasticity (GARCH) models and Markov-switching dynamic regression. These econometric techniques are utilized to examine the relationship between fiscal consolidation uncertainty and total foreign debt, considering different regimes of fiscal policy. Findings The findings suggest a positive correlation between uncertainty in the cyclically adjusted primary balance (CAPB) and South Africa’s total foreign debt. This indicates that increased uncertainty in government revenue and expenditure leads to a greater reliance on foreign borrowing to finance deficits. Originality/value This study contributes to the literature by accounting for time-varying elasticity in CAPB and analyzing its impact on total foreign debt. By highlighting the importance of effective revenue management, tax administration and risk management strategies, it provides valuable insights for policymakers aiming to stabilize government revenue streams and mitigate the adverse effects of fiscal consolidation uncertainty on foreign debt.