MTBPS: higher borrowing projections increases rating risk, says Investec’s Bishop

Investec chief economist Annabel Bishop. Photo: Supplied

Investec chief economist Annabel Bishop. Photo: Supplied

Published Nov 2, 2023


By Annabel Bishop

2023’s Medium-Term Budget Policy Statement (MTBPS) has seen deterioration in the fiscal metrics, key of which are the government’s debt to gross domestic product (GDP) and fiscal deficit projections.

The budget is consequently credit negative, with the risk of credit rating downgrades having risen for South Africa, and the three key rating agencies, Fitch, Moody’s and S&P to potentially give their country reviews this month.

Specifically, the medium-term, gross debt is projected to now peak at 77.7% of GDP in 2025/26, versus February’s Budget estimate of 73.6% of GDP for the same year.

The current fiscal year (2023/24) has seen a substantial reduction in projected revenue collection as expected, by -R56.8bn lower, raising the budget deficit. The 2023/24 budget deficit is now projected at -4.9% of GDP versus the -4.0% of GDP estimated for this fiscal year in February, while expenditure is cut by R85bn over two years (2024/25 and 2025/26).

The following three medium-term years of 2024/25 to 2026/27, see the budget deficit projected at -4.6% of GDP, -4.2% of GDP and -3.6% of GDP versus the February 2022 Budget estimates of -3.8 % of GDP and -3.2% of GDP. A significant degree of fiscal slippage is evident consequently.

Worryingly, gross debt is projected to still remain above 70% of GDP in 2031/32 and the expanding debt ratio has reduced the sustainability of government finances, with a debt ratio of 60% of GDP seen as the maximum sustainable debt ratio for an emerging market economy.

While personal income tax collections have seen resilience this year, National Treasury warns on the weak outlook for employment, while corporate taxes have already seen significant under collection this year, which is anticipated to continue out to 2026/27.

Higher VAT refunds come as renewable energy infrastructure has been ramped up, along with spend to bolster capacity as the country’s freight transport system and fuel refining capacity weakened.

The next two years, 2024/25 and 2025/26 see revenue projections lowered by R152bn, and in contrast only R85bn is cut from expenditure, which has widened the budget deficit and debt projections as % of GDP.

Higher public servant remuneration is a key factor in preventing further expenditure cuts, and additional spend of R128.4bn partly counteracts the planned R213.3bn in cuts over the next two years.

On the expenditure cut front, this includes the R133.6bn cut from government departments and unassigned provisional allocations. The higher spending of R128.4bn comes from R57.2bn in higher than budgeted for public servant increases this year, and the R33.6bn due to the prior extension of the Social Relief of Distress Grant.

The expenditure cuts have been favourably received by the markets, along with planned tax measures to raise revenue, as lower commodity prices and higher VAT refunds weakened revenue.

The expenditure ceiling has dropped by R36.9bn, in 2024/25, and by a further R47.3bn in 2025/26, which has added to the efforts to contain the fallout from lower revenue collections and the rand has strengthened in response, reaching R18.55 against the dollar in some relief straight after the MTBPS release.

Markets have shown some relief at the proposed areas of government restraint, although the credit rating agencies are likely to place South Africa back on negative outlooks, with risks for downgrades. The rand has also likely been stronger as the US Federal Reserve has not been expected to hike this month.

National Treasury sees quicker GDP growth from next year, in line with our view but points particularly to the weak economic outlook as having a key impact on the deteriorated fiscal projections of the MTBPS. Higher bond yields, along with planned increased borrowings, have seen projected debt service costs rise by R51.5bn, along with the effects of rand depreciation.

The risk premium has increased for South Africa (the extra reward investors require to invest in South African debt, particularly rand debt), and it has pushed up bond yields in South Africa.

Higher inflation globally and higher interest rates over the past couple of years have placed upwards pressure on bond yields, and the MTBPS says that the average funding cost has risen to 9.5% (October 2023), from 8.3% at the time of the Budget Review in February this year. As a mark of the fiscal weakness, the tax to GDP ratio is forecast to decline from 25.1% logged in 2022/23 to 24.7% in 2023/24. Indeed, a marked improvement in the ratio is linked to the sustainable lift in GDP growth.

The rand has strengthened in relief overall at the modest nature of the proposed tax measures, with the additional R15bn likely to come from no change to tax brackets to account for bracket creep (the effect of higher inflation on earnings), with the tax buoyancies estimated lower over the medium-term.

Stabilising the rising debt issuance is paramount to reduce the escalation in bond yields that the country has seen in the past decade and in this decade to date.

Annabel Bishop is the chief economist at Investec.