Finance minister Malusi Gigaba, in his maiden Medium-Term Budget Policy Statement (MTBPS), laid bare the extent of South Africa’s fiscal woes. And in doing so, prompted speculation among economists that further credit ratings downgrades by year-end are all but inevitable.
To his credit, experts labelled the budget both honest and realistic. Gigaba, himself, said: “It is not in the public interest, nor is it in the interest of government, to sugar-coat the state of our economy and the challenges we are facing.”
He slashed GDP growth forecasts down from 1.3%, as tabled by former finance minister Pravin Gordhan in the February Budget, to 0.7% for 2017. This, in turn is expected to result in a revenue shortfall of R50.8 billion and a budget deficit of 4.3% of GDP compared with the 3.1% forecast previously. Debt-to-GDP is to rise to 61% over the next three years.
Despite the widening deficit and debt ratio, consolidated spending is to rise by 7.3% year-on-year over the next three years from R1.6 trillion in 2017/2018 to R1.9 trillion in 2020/2021. Infrastructure spend will comprise R948 billion or 5.9% of GDP over the medium-term expenditure framework, of which R402.9 billion is to be utilised by state-owned companies (SOCs).
Citing fiscal deterioration and an adverse reaction on the currency and bond markets, Dawie Roodt, director and chief economist at Efficient Group, labelled the budget “a bit of a disaster”.
The rand fell to its lowest level against the dollar in ten months while dollar bonds issued by government came under pressure. According to Sanisha Packirisamy, an economist at Momentum Investments, the markets reacted to a lack of commitment to fiscal consolidation, no stabilisation in debt ratios as well as no indication as to how the revenue shortfall would be plugged.
For Lesiba Mothata, executive chief economist at Alexander Forbes Investments, the markets also reacted to Gigaba’s “worrisome” confirmation that fiscal deterioration is worse than expected and that all metrics related to fiscal consolidation also deteriorated.
George Glynos, managing director at ETM analytics, likened the situation to a deer caught in headlights. “We’re not making the hard decisions that need to be made. We’re running our fiscal position into the ground and leaving the country increasingly vulnerable to investor confidence. The budget was uninspiring – a lost opportunity – and is fostering more of a degradation,” he said.
Roodt echoed his sentiments, saying decisive action is required to stem the fiscal deterioration before inclusive growth and radical economic transformation, both of which Gigaba referred to, ought to be addressed. “I would have liked to see him standing up and saying ‘Listen, we’ve run out of money. We have to cut back on spending, if we don’t do that we’re going to get into big trouble’”.
The tone throughout the MTBPS reflects a National Treasury that feels “very trapped” by the economic and fiscal situation as well as the narrative around state capture, said Gina Schoeman, a South Africa economist at Citi. “It is a good reality check for government and shows that things are going to continue to deteriorate unless there are sweeping changes.” But she warned against taking the “surprising realism” as positive in that the MTBPS failed to lay out a plan to address the country’s significant challenges.
Packirisamy and Mothata also found the MTBPS wanting as, unlike in the past, it failed to give a clear indication as to what to expect in next year’s main budget, due February 2018, particularly regarding where government would find additional revenue sources.
Mothata went on to describe the newly-formed Presidential Fiscal Committee, which the budget statement says will consider a range of steps to bring the public finances back onto a sustainable path and make such announcements in February 2018, as “ominous”. “Since 1994, there has never been such a team. The team at National Treasury has the capacity to deal with these tasks, as they have done in the past. This new process adds to the uncertainty regarding policy. We need details to further understand the value add.”
All five economists said the probability of foreign and local currency credit ratings downgrades by S&P Global Ratings on November 24, has increased substantially. Prior to the MTBPS and renewed concerns about political stability, some had expected S&P to wait for the outcome of the ANC’s December elective conference before taking action.
Schoeman said the MTBPS delivered little to no positive signals to ratings agencies. Such signals may have an explicit turnaround plan, more information government’s contingent liabilities to SOCs as well mention of upcoming public sector wage negotiations. She previously flagged contingent liabilities and the public sector wage negotiations as the two things that haunt fiscal policy.
She said the three scenarios generation by National Treasury to quantify risks to its baseline forecasts were insufficient. The first two scenarios involve downgrades to the local currency rating and subsequent effects of various degrees while the third scenario relies on an improvement in global growth and commodity prices. “The first two scenarios are out of our control and the third relies on us getting lucky. There needs to be a fourth scenario, in which we actually do something to address our challenges,” she said.
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