Balancing debt against cost of boosting economy tightrope act
JOHANNESBURG - Finance Minister Tito Mboweni will have his work cut out in trying to reduce the country’s runaway debt amid growing expenditure meant to resuscitate the economy after the impact of Covid-19.
Mboweni will table a growth-friendly Medium Term Budget Policy Statement (MTBPS) on Wednesday as the economy continues to take a battering from the Covid-19 pandemic, with growth expected to shrink by between 7 and 8percent this year.
South Africa’s gross national debt is projected to be close to R4trillion, or 81.8percent of gross domestic product (GDP), by the end of this fiscal year.
This is while tax revenue is declining, with a R300billion shortfall expected this year.
Projected total consolidated budget spending, including debt service costs, will exceed R2trln for the first time.
Mboweni in June said the government will narrow the deficit and stabilise debt at 87.4percent of GDP in 2023/24.
FXTM senior research analyst Lukman Otunuga said the MTBPS would be a critical factor in shaping South Africa’s economic outlook for the rest of 2020 and well into 2021.
“With cautious investors and credit agencies likely to heavily peruse the budget for critical insight into how the government plans to tame spending and growing public debt, no stones must be left unturned.
“On the bright side, there is a growing sense of optimism over South Africa rebounding strongly in the third quarter of 2020.”
When presenting the economic recovery plan last week, President Cyril Ramaphosa emphasised that current debt levels cannot be maintained.
Ramaphosa said Mboweni would outline a “fiscal framework that provides a path of fiscal consolidation, debt reduction and reprioritisation that is supportive of growth and recovery”.
Investec’s chief economist, Annabel Bishop, said the R100bn “Presidential Employment Stimulus” over three years would boost confidence somewhat.
“However, this will not be a solution for South Africa’s extremely high unemployment rates, nor a major revenue creator to plug the hole in government finances, nor the solution the rating agencies are looking for to repair South Africa’s government finances, which are slipping towards C grade,” Bishop said.
The main Budget deficit is projected to widen to 15percent this year, and narrow to 11.1percent and 9.6percent in the 2021/22 and 2022/23 financial years.
The deficits could be even wider should expenditure to support state-owned entities increase, a main worry for credit rating agencies.
South Africa’s sovereign credit rating has been downgraded below sub-investment level by all three major rating agencies.
Econometrix chief economist Dr Azar Jammine said that there was substance in Ramaphosa’s plan, which could starve off a ratings downgrade, at least for now.
“One can be cynical and say we have heard it all before, but there is substance in the plan.
"But the fact is that if you give Ramaphosa the benefit of doubt, you can be looking at a positive future overall where corruption is vastly reduced, judiciary independent, and then fiscal position improves substantially,” Jammine said.
“About three months ago, I would have said there is a great chance we will be downgraded.
"But maybe the rating agencies will give us another stay of execution until March to assess the situation.”