Much of the focus in the lead up to Wednesday’s budget speech was whether finance minister Malusi Gigaba would present something convincing enough to keep Moody’s from downgrading South Africa’s sovereign credit rating. Moody’s is the only one of the three major agencies that still rates South Africa’s debt at investment grade.
While the budget did leave some questions unanswered, the consensus among analysts appears to be that Gigaba did enough.
“I think the fiscal adjustments were generally bigger than we expected,” says Elna Moolman, senior economist at Standard Bank. “From a sustainability perspective, that’s very positive, and from a credit ratings perspective it’s equally positive. It supports our view that Moody’s won’t downgrade South Africa next month.”
PwC economist Christie Viljoen says that this budget was definitely better than what Gigaba presented at the Medium-Term Budget Policy Statement last year.
“We heard concrete plans for narrowing the deficit, and concrete plans for getting public debt to peak and come down again,” Viljoen notes. “Those were the key things lacking in October. I think this is good enough to keep us from another downgrade. It showed that we have ideas on how to balance the fiscal situation, and it showed a better outlook for economic growth.”
The most critical issue for Gigaba was providing a commitment to containing the budget deficit and keeping government debt under control. Ultimately, this required a decision that may be politically unpopular, but which had perhaps become inevitable.
“We needed to see a commitment towards consolidation, and the 1% VAT hike provided that,” says co-head of fixed income at Investec Asset Management, Nazmeera Moola.
However, the fact that government has had to increase VAT also shows that it may have reached the end of the road for raising additional revenues.
“If we look around the world, successful fiscal consolidation always goes along with a decline in spending relative to GDP,” says economist at Sanlam Investments, Arthur Kamp. “Spending pressures like free higher education didn’t allow us to lower this expenditure ratio in this budget, and that means we had to increase the tax burden. We still have an increasing tax to GDP ratio, and that cannot continue indefinitely.
“I think that says that we have reached limits on what we can do on the spending side,” Kamp adds. “That is a concern in an economy where unemployment is still north of 25%. It means our only option going forward is to broaden the tax base, and the only way to to do that is by growing the economy.”
Moolman says while the budget did well in addressing the immediate concerns, government now has to take steps towards sorting out the issues that will ensure longer-term prosperity.
“Ultimately the situation is one in which we have a short-term crisis that needs significant interventions, and we saw that,” she says. “But over the longer term we need to see stronger economic growth and decisive interventions to improve the efficiency of government spending. That is the only way to ensure all of this is sustainable.”
Ian Matthews, the head of business development and special projects at Bravura, agrees.
“I think the government has taken the view that they are going to have to take some hard decisions in the next few years in terms of getting spending cuts through the budget,” Matthews says. “They also recognise that they need to grow themselves out of this, because, going forward, what we have is not sustainable. You can cut expenses and increase taxes only so many times until you need to come up with a different plan.”
For Kamp, this means enacting reforms that will encourage investment.
“The minister spoke about supporting small and medium enterprises, and this is particularly important,” says Kamp. “Those are the employment generators in an economy. We have however been talking about this for a long time, and now we really need to get going on that type of reform.”