SA faces danger of sovereign debt crisis by 2024
JOHANNESBURG - Finance Minister Tito Mboweni has warned that the country’s budget deficit would rise to unsustainable levels in the next four years if the government did not curb further borrowing that could push an already weak fiscal position to the brink of a debt crisis.
Mboweni told Parliament this week, ahead of his emergency budget on the fiscal impact of the coronavirus (Covid-19) pandemic on Wednesday, that the National Treasury would make “very serious and unusual changes” to its expenditure plans. “We can no longer spend the way we were spending before. We are much, much poorer and therefore all of us have to adjust our expectations,” Mboweni said.
“A sovereign debt crisis is a very serious matter and we are looking it in the eye by 2024 if we do not redo our budget, if we do not manage our house finances carefully.”
Mboweni’s revised fiscal framework would account for substantial revenue losses emanating from the economic shock of the pandemic and the lockdown. The SA Revenue Service has forecast that tax collection will be around R285 billion lower than previously expected, adding pressure on already weak growth domestic product (GDP).
Most economists project that the revenue shortfall and the recently announced R500bn stimulus package would drive the fiscal deficit into double-digit territory for this year and the next. Investec’s Kamilla Kaplan said this special adjustment budget was likely to outline a significant deterioration in fiscal ratios.
“We expect a substantial revenue shortfall, increased spending pressures and a contraction in nominal GDP growth will yield a 2020/21 consolidated budget deficit of 15 percent of GDP, versus National Treasury’s original forecast of a 6.8 percent of GDP deficit,” Kaplan said. Mboweni said the government wanted all expenses justified for each new period under the proposed zerobased budgeting. He said the process would involve matching each expense item with a justifiable reason for the corresponding period, adding that the government needed to review its expenses to avoid a fiscal slippage. “If we don’t do this, by 2024 this country will be in a situation where the debt to GDP ratio will be higher than the GDP of the country,” he said.
“In simple technical economic terms, that means we are going to be in a sovereign debt crisis.” Old Mutual’s Johann Els said the zero-based budgeting was still a proposal that was doubtful on whether it could be implemented in the near future.
“A zero-based budgeting approach is another potentially good opportunity to reduce wasteful expenditure, which will send the right message to foreign investors,” he said. Els, however, said the pandemic could also be a good crisis not to let it go to waste. “We will hopefully look back on the response to the pandemic as the start of a long-desired turnaround,” he said.
South Africa’s stubborn expenditure items such as the ballooning public sector wage bill and mismanaged state-owned enterprises have added significant pressure to the fiscus.