Investec Economist Anabel Bishop Picture: Simphiwe Mbokazi.
Investec Economist Anabel Bishop Picture: Simphiwe Mbokazi.

The fiscal metrics have not disappointed, says Investec’s Bishop

By Time of article published Nov 13, 2021

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THE 2021 Medium Term Budget Policy Statement (MTBPS) has seen the expected improvement in the government’s debt-to-gross domestic product (GDP) projections and fiscal deficits.

Over the medium term, gross debt is projected to now stabilise at 78.1 percent of GDP in 2025/26, from 88.9 percent of GDP in February, with the declining ratio not due to any major drop in borrowings, but instead the revisions to GDP.

Gross loan debt came out at 70.7 percent of GDP for 2020/21, versus the 80.3 percent of GDP projection in the February 2021 Budget revenue, lowering the trajectory going forward.

The following three medium-term years of 2022/23 to 2024/25 are projected above our forecasts of 73 percent, 74.5 percent and 75.7 percent of GDP, at 74.7 percent, 76.8 percent and 77.8 percent of GDP.

The National Treasury’s economic outlook averages 1.7 percent growth over 2022 to 2024 versus the consensus of closer to 2 percent and ours of 2.3 percent year-on-year – although with the intensification of load shedding the outlooks are at risk.

Debt creeps down in rand values to R5.1 trillion by 2023/24, from R5.2trln projected in February this year, and is lower each year from 2020/21 to 2024/25 than was also projected in February as well.

The Budget deficit for 2021/22 is forecast at -7.8 percent of GDP (versus the National Treasury’s Budget revenue (BR) projection of -9.3 percent) and, thereafter, drops to -6.0 percent of GDP for 2022/23 (BR -7.3 percent) and -5.3 percent in 2023/24 (6.3 percent).

It may be enough to avoid sovereign credit rating downgrades from ratings agencies Fitch and S&P Global Ratings in November, who have South Africa on BB- currently, but Fitch continues to have a negative outlook, as does Moody’s at one notch up. We believe while the agencies will not downgrade South Africa in November, they will keep a very close watch.

The rand strengthened to R15.19 to the dollar as South Africa’s credit risk has slightly moderated.

The sheer quantum of debt, however, is still projected to climb further, with 2024/25’s R5.5trln double 2018/19’s R2.8trln.

This is still a decline in fiscal health as borrowings continue to rise, and this will not allow for any credit rating upgrades, nor likely a removal of the negative outlooks that two key agencies have South Africa on.

Debt service costs (interest expenditure) continue to climb, but are fractionally lower than the 2021 Budget projection, peaking at 5.4 percent of GDP in 2025/26 (from 5.3 percent), as gross debt does at 78.1 percent, with bonds strengthening somewhat.

The budgeted figures present an improvement, but all the projections would be at great risk if there are further crises which depress revenue and increase expenditure.

Consequently, the MTBPS affirms that over the next three years “spending will remain restrained. The government will avoid permanent increases in departmental or programme baselines, or further bailouts of State-owned companies, which would compromise fiscal sustainability.”

Instead, short-term tax windfalls will be targeted to reduce the Budget deficit and fund temporary priorities, such as extended support for poor households and public employment.

In line with the government’s commitment to support vulnerable households, particularly given the impact of Covid-19, additional resources for social relief will be considered if the fiscal situation improves.

The focus remains on fiscal consolidation, as well as economic reforms to drive growth and employment, particularly diversifying energy generation, releasing broadband spectrum, opening third-party access to the freight rail network, the eVisa system roll-out, reviewing the legal regime governing skilled migration and accelerating infrastructure investment.

Additional resources to low-income households are also included, with higher than previously projected expenditure on the health and social development components of the social wage, but the future extent will depend on revenue growth.

The MTBPS reiterates the necessity for structural reform in South Africa, which continues to lag, delaying recovery in the private business sector activity and so job creation.

Annabel Bishop is the chief economist at Investec.


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