Budget 2021: Debt to GDP ratio to stabilise below 90%
By Helmo Preuss
PRETORIA - The 2021 Annual Budget aims to stabilise the debt to GDP ratio below 90 percent compared with projections in the October 2020 Medium Term Budget Policy Statement (MTBPS) that saw the ratio rise to 95.3 percent in 2025/6.
The projections are however far worse than the February 2019 Budget projection of stabilising the ratio near 60 percent as the projection then was a peak of 60.2 percent of GDP in 2023/24.
Relative to the 2020 MTBPS projection, Treasury expects the deficit to narrow at a slightly faster pace, while improved cash balances reduce the borrowing requirement and debt issuance over the medium term. Debt is now projected to stabilise at 88.9 percent of GDP in 2025/26.
The Treasury said then as it does now that without intervention, a continued increase in debt and debt-service costs will crowd out economic and social expenditure.
If economic growth does not strengthen in the period ahead, more difficult fiscal adjustments will be required to return the public finances to a sustainable path.
Treasury said that the main risks to the financing strategy were three-fold.
The first was a widening budget deficit which would most probably increase the cost of funding alongside the stock of debt. Compared with the MTBPS, the fiscal deficit to GDP ratio was cut to 14.0 percent from 14.8 percent.
The second risk factor related to inflation and exchange-rate risks as unanticipated increases in inflation or a depreciation in the rand exchange rate would increase the cost of outstanding inflation-linked or foreign-currency debt.
The third risk related to South Africa’s sovereign credit ratings, which have been downgraded to junk status since April 2017. Further downgrades deeper into the sub-investment junk territory would result in a higher budget deficit, rising debt levels and weak economic growth.