The rand weakened by nearly 2% against the US dollar on Wednesday after Finance Minister Tito Mboweni revealed in the Medium-Term Budget Policy Statement that SA faces wider government deficits and higher debt.
Before Mboweni revealed his mini budget, the rand was trading at R14.61 against the US dollar at 13:50 on Wednesday. After the conclusion of his speech, the rand was trading at R14.84 at 14:30 – pegging the losses to the local unit at about 1.7%.
Government bonds were unchanged on Wednesday afternoon, with the yield on the benchmark 2026 bond at 8.20%.
Mboweni revealed that gross tax revenue is projected to fall short of the 2019 budget estimates by R52.5 billion in 2019/2020 and R84 billion in 2020/2021, reflecting a weaker economic environment and a decline in tax morality that is still haunted by the state capture years.
The revised gross tax revenue for 2019/2020 is R1.369 trillion compared with the R1.422 trillion announced in the February budget.
The combination of lower revenue and increased spending has widened the budget deficit to an average of 6.2% over the next three years.
Mboweni described the current state of the country’s finances as “unsustainable” and the need for structural reforms is urgent.
SA is battling to kick-start economic growth, with the National Treasury’s target of a 1.5% expansion in 2019 unlikely after nationwide power cuts by power utility Eskom dragged the economy into contraction in the first quarter.
Treasury officials have downgraded SA’s economic growth forecast for 2019 from 1.5%, which was projected earlier in the year, to 0.5%, blaming heightened policy and political uncertainty that have weighed on investor confidence.
Credit rating agencies including Moody’s and investors will probably watch SA’s worrying debt levels closely. South Africa’s debt-to-GDP ratio remains the highest among its peer countries.
The on-going support to debt-laden state-owned entities, mainly Eskom, is blowing the country’s debt profile to higher levels. Government has made provisional support to Eskom of R49 billion to be available in 2019/20, R56 billion in 2020/21 and R33 billion in 2021/22.
With the financial support to Eskom, the country’s debt-to-GDP is expected to grow from the 56.2% for 2019/20 presented in the 2019 February budget to 60.8%, 57.8% versus 64.9% in 2020/21 and 58.9% versus 68.5% in 2021/22.