Fitch Ratings agency warns SA’s financial projections tabled during MTBPS could fail to materialise

Fitch forecasts consumer price inflation (CPI) to reach 5% in FY25. File image.

Fitch forecasts consumer price inflation (CPI) to reach 5% in FY25. File image.

Published Nov 7, 2023


Fitch Ratings agency has warned that South Africa's recent financial projections tabled during last week's Medium-Term Budget Policy Statement (MTBPS) could fail to materialise as a result of very high and continuously increasing public-sector wage bill, especially from pressure against consolidation in an election year.

The ratings agency yesterday issued its response to the MTBPS tabled by finance minister Enoch Godongwana which projected that the government’s debt-to-GDP will rise higher to 77.7% in the fiscal year ending March 2026.

Fitch's associate director for sovereigns Thomas Garreau said this was broadly in line with their own projections.

However, Garreau said there was a significant risk that the government could fail to meet its ambitious fiscal targets as wage cost control is set to be particularly challenging.

The government’s MTBPS raised the projected fiscal deficit for FY24 to 4.9% of gross domestic product (GDP), up from 4% in the 2023 Budget.

This was largely due to weakness in revenue collection, with tax revenue set to record a shortfall of more than R58 billion as problems with power generation and freight rail have constrained economic activity and windfall revenues from strong commodity prices have dropped off.

Garreau also said the revenue shortfall was broadly in line with Fitch's projections, with revenue seen reaching 27.3% of GDP in FY24, against Fitch's September forecast of 27.1%.

"We still view the government’s target of achieving a primary budget surplus this year as realistic. Our medium-term forecasts match MTBPS projections, with revenue plateauing at around 27% of GDP, from 28.2% in FY23, though the risk it falls short of this target remains significant given the weak economic environment," Garreau said.

"Nonetheless, we believe the MTBPS assumptions around public-sector wage growth may be overly optimistic, pointing to risks of higher government debt.

"The government projects a consolidated wage bill increase of 5.1% for FY24 and 2.2% for FY25, lower than the 7.5% pay increase for FY24 and the CPI-linked increase for FY25 contained in the last public-sector wage agreement.

"The target could still be reached, for example, through headcount reductions, but South Africa’s general election in May 2024, resistance from unions and high underlying socio-political risks will make significant headcount reduction difficult."

Fitch forecasts consumer price inflation (CPI) to reach 5% in FY25.

Garreau said there was also some risk that contingent liabilities associated with distressed State-owned enterprises could crystallise on the government’s balance sheet.

Transnet posted an annual loss of R5.7 billion in FY23 and in October indicated that it was seeking an equity injection from the government.

Eskom has also posted a historic loss of R23.9 billion in the 12 months ending 31 March 2023 and is forecasting similar losses in the next financial year.

Fitch has maintained South Africa's credit rating below the investment level for the past three years.

Garreau said South Africa’s credit profile remained supported by a favourable debt structure, with long maturities and denominated mostly in local currency, as well as a credible monetary policy framework.

"However, a durable resolution of its fiscal challenges would require a substantial acceleration of growth," he said.

"Fitch projects only a minor strengthening in GDP growth to 0.9% in 2024 and 1.3% in 2025, from 0.5% in 2023, presenting challenges for fiscal consolidation."