South African Finance Minister Tito Mboweni’s commitment to slash government spending is unlikely to rein in debt and stabilise state finances over the medium term.
While Treasury announced plans to reduce spending by a net R156 billion over the next three years, debt is forecast to continue climbing as weak economic growth curbs tax collections, the National Treasury said in the Budget Review Wednesday.
These charts show the deterioration in South Africa’s economic and fiscal prospects:
The National Treasury cut its forecast for growth in gross domestic product for 2020 to 0.9% from 1.2%. That’s in line with recent revisions from the World Bank and International Monetary Fund. Africa’s most-industrialised economy is stuck in its longest downward cycle since World War II, with rolling blackouts and poor business and consumer weighing on growth. The economy hasn’t expanded by more than 2% annually since 2013 and the government doesn’t see it reaching that level by 2022.
South Africa’s budget deficit as a percentage of GDP is set to widen to 6.8% in the fiscal year ending March 2021. That’s the highest since 1992-93, when the gap was 7.2%, and compares with a forecast of 6.5% in October’s medium-term budget policy statement.
While Mboweni allocated additional money to only two loss-making state-owned companies — arms maker Denel and South African Airways which was placed in a local form of bankruptcy protection in December — debt is expected to overshoot the government’s October estimates. Still, the earlier projection for the 2028 fiscal year of 81% of GDP was trimmed to 78%, according to Ian Stuart, acting head of the budget office.
“Halting the fiscal deterioration requires a combination of continued spending restraint, faster economic growth, and measures to contain financial demands from distressed state-owned companies,” the National Treasury said.
The relentless increase in debt means the cost of servicing these obligations will grow faster than any other expenditure item and more than double the average annual growth rate for total spending over the next three years. That’s despite the Treasury being able to match higher borrowing requirements without dramatically increasing yields. Prudent debt management can’t substitute for sustainable public finances and a growing economy, the Treasury said.
While public-sector wages remain the single largest expense for the government, the cost of debt crowds out spending on items such as healthcare. The government will spend more than 15% of its revenue on servicing debt in the current fiscal year.
After Moody’s Investors Service changed its outlook on the nation’s last investment-grade credit rating to negative in November, the run-up to Wednesday’s budget focused on whether Mboweni would be able to present a credible debt strategy to prevent it from changing that assessment to junk. According to the budget document, the risk to the rating has become more pronounced and economists including PwC’s Lullu Krugel and Christie Viljoen said a downgrade is “quite certain.”
Still, Mboweni told reporters before he’s confident that Moody’s will not remove the investment-grade credit rating based on the government’s fiscal stance.
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