Johannesburg - South Africa was not approaching a fiscal cliff that would force it to go, cap in hand, to global investors for a bailout despite the significant deterioration of the economic outlook, analysts said yesterday.
Nigeria and Angola, Africa’s two biggest oil producers, have both been in talks with the World Bank about support to help cope with low crude prices, weakening currencies and strained public finances.
Read: Dim outlook for SA, warns World Bank
Azar Jammine, the chief economist at Econometrix, said a fiscal cliff in South Africa was very far fetched.
“South Africa’s public debt is very low compared with other countries. A fiscal cliff will come about if the fiscal policy is not astute. That could lead to a junk status,” Jammine said.
South Africa’s debt is about 49 percent of gross domestic product (GDP).
A fiscal cliff in South Africa would occur when social grant expenditure and public service pay absorb all of the government’s revenue.
The International Monetary Fund (IMF) and the World Bank have both forecast South Africa’s economic growth this year at less than 1 percent, down from earlier projections of 1.3 percent. This growth rate is the lowest since the global crisis of 2009.
The World Bank said in its economic update on South Africa on Tuesday that domestic growth was weighed down by a combination of external and internal factors. These included weaker commodity prices, lower Chinese demand and rising US interest rates, as well as policy uncertainty, infrastructure gaps and severe drought at home.
Economists have said Finance Minister Pravin Gordhan will have to walk a tightrope when he tables his Budget on February 24.
As the country is faced with a fiscal slippage, Gordhan is expected to raise taxes.
Those who say South Africa is rapidly approaching a fiscal cliff cite the steady rise in expenditure as a proportion of GDP, while tax revenue is declining because of the erosion of the tax base.
Hugo Pienaar, an economist at the Bureau for Economic Research, said the economic situation was not as bad as had sometimes been portrayed, and it did not warrant South Africa asking for a bailout from the IMF.
“But if debt increases and South Africa cannot pay, then it will go for a bailout from the IMF,” Pienaar said. “Debt is currently about 45 percent of GDP from 25 percent before the recession. That is really low and is relative to South Africa’s peers.”
Raymond Parsons, a professor at the North West University School of Business and Governance, said while it was right to warn about the dangers of a possible fiscal cliff, Gordhan and other stakeholders’ preoccupation with avoiding South Africa being downgraded to junk status meant remedial action was still possible.
Parsons said despite the changing circumstances the country found itself in, it could still avert a further investment downgrade this year. “The focus must now be on what the economy needs at present if its growth prospects are to be improved and worst case scenarios are to be avoided.”
He said to manage fiscal challenges and restore credibility in the Budget, Gordhan would need to make tough decisions about government spending, the level of borrowing and the tax mix.
“The margin of error is small. What happens to government spending will be a more important signal than taxes, as the downward risks of ‘tax and spend’ policies are high,” he said.
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