South Africa's low growth trap was brought sharply into the spotlight with the release ... Recapitalisation of South Afr
FISCAL CONSOLIDATION THROWN OUT OF THE WINDOW JOHANN ELS | HEAD OF ECONOMIC RESEARCH
HUGELY DISAPPOINTING MID-TERM BUDGET WILL LIKELY LEAD TO RATINGS DOWNGRADES BEFORE YEAR-END. FINANCE MINISTER MALUSI GIGABA'S first Medium-Term Budget Policy Statement (MTBPS) missed the mark completely − raising deficit and debt targets substantially without a plan to rein them in over the period of the medium-term expenditure framework.
This is of huge significance as it seems that the policy of fiscal
South Africa’s low growth trap was brought sharply into the
were certainly no concrete plans to boost economic growth. As
spotlight with the release of the October MTBPS. Slower than
with previous years, there was also acknowledgment of the
expected growth is significantly impacting tax revenues. The revenue shortfall this fiscal year will likely amount to a projected R51 billion – totalling a massive R210 billion for the three years to 2019/20 (relative to the February 2017 estimates). The
consolidation has now been abandoned – that is, plans to reduce the deficit over time in order to stabilise the debt ratio. Keeping the deficit close to 4% over the next three years shows that no attempt was made at further significant expenditure cutbacks, there were no plans for extra tax revenue and there
DEFICIT LARGER FOR LONGER 2%
February 2017 Budget
Actual deficit outcome
October 2017 MTBPS 0%
deficit for the current year was thus raised to 4.3% of GDP, from a February budget estimate of 3.1%. While a higher deficit than February’s estimate was widely expected, the revised 4.3% estimated shortfall came as a shock, as it was
-2%
-4%
-6%
significantly higher than expected. -8% 1996
1998
FISCAL CONSOLIDATION FADES AWAY The further expected shortfalls in tax receipts over the next few years have led to the deficit staying at 3.9% of GDP into 2020/21 – versus previous estimates for the deficit to reduce to 2.6% of GDP by 2019/20. This was a big “miss” in terms of market expectations.
2016/17 2017/18 2018/19 2019/20 2020/21
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Budget balance (% of GDP) February 2017 October 2017 -3.3% -3.3% -3.1% -4.3% -2.8% -3.9% -2.6% -3.9% -3.9% Source: National Treasury
difficulty to reduce the deficit, but at least previously there were
this recapitalisation. Yet, continued support for SAA remains
always some plans (reduction in spending and extra tax
controversial. Improved management of SOEs is crucial as
measures) and commitments in place to adhere to fiscal
Government could be exposed to significant risk as contingent
consolidation. There were no such plans or attempts this time
liabilities (that is, state guarantees for SOE debt) amount to
around − not even the floated idea in the February budget of
R690 billion – or 15% of GDP! This means that if these SOEs
removing the VAT zero-rating on fuel got a mention (which could
should all fail (unlikely, but…), Government’s debt ratio will be
bring in an additional R18 billion).
15% higher! Treasury mentions in the budget documentation
The question can be asked whether there is a lack of political will in these uncertain times before the crucial elective conference by the ruling party. There is probably some truth in
that the combined profitability of SOEs (measured by return on equity) declined from 7.5% in 2011/12 to an estimated 0.2% in 2016/17.
this, but at a time when the country’s credit ratings are already
As a result of the deterioration in the fiscal position, the
at serious risk of further downgrades, it is very dangerous not to
previously projected surpluses in the primary budget balance
have a clear plan in place to prevent downgrades.
are no more (this refers to a key part of a country’s fiscal health
This lack of a plan to reduce the deficit also meant that the debt-to-GDP ratio target was lifted substantially − from peaking around 53% of GDP and then stabilising to rising above 60%. Again, there was no plan to curb this growth or to stabilise the debt ratio.
and is measured in terms of what the budget balance looks like when excluding interest payments on government debt). The primary balance is now projected to remain around a -0.7% deficit over the next three years, from previously heading towards a +0.3% surplus – thus a 1% swing. Scraping the bottom of the barrel to find some positives in the
DEBT RATIO SIGNIFICANTLY WORSE
MTBPS, here are two: The first is that Treasury’s GDP growth forecast for this year and next seems slightly conservative.
65%
October 2017 MTBPS February 2017 Budget
60%
Treasury expects a 0.7% rise in GDP this year and 1.1% for 2018, while at MacroSolutions we expect +0.8% and
50%
+2.0%, respectively. This could alter the tax revenue scenario somewhat. The second positive was that the Minister said that
40%
Treasury cannot approve nuclear power, yet. While it is positive 30%
20% 1960
that he acknowledges we cannot afford nuclear power, 1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
I worry about the word “yet”.
Source: National Treasury
NO PLAN FOR SOEs Another negative aspect of the MTBPS was that there was no serious or credible plan to address bad management or corporate governance issues within state-owned enterprises (SOEs). Recapitalisation of South African Airways (SAA) is costing R10 billion this year, causing a breach in the previously sacrosanct expenditure ceiling, as this is not yet happening in a deficit neutral manner. The Finance Minister did mention that some of Government’s shares in Telkom might be sold to finance
KEY TAKEOUTS: • CURRENT YEAR DEFICIT RISES FROM 3.1% TO 4.3% • EXPENDITURE CEILING WILL BE BREACHED • DEBT RATIO IS GOING TO BE ABOVE 60%
Main Budget in February this year were positive on the major
WHAT DO THESE FISCAL PLANS MEAN FOR THE ECONOMY?
measures of fiscal consolidation (extra revenue measures and
We expect growth to recover somewhat from 0.3% of GDP in
expenditure controls, including reducing the expenditure ceiling,
2016 to about 0.8% this year and around 2% in 2018.
reducing the deficit targets going forward, moving towards
Inflation is expected to ease further, to close to 4% early in
primary surpluses and stabilising the debt ratio). I rate all of
2018, and should average 4.7% in 2018 compared with
these negative this time around. In fact, in all the years that I
5.3% in 2017 and 6.3% in 2016. However, possible further
have been looking at budgets − since 1976 when I was in
ratings downgrades creates significant uncertainty in terms of
standard 6 or today’s grade 8 (don’t judge) − I have never
the currency, growth, inflation and interest rates. For now, the
seen such a disappointing budget!
South Africa Reserve Bank will likely hold off any further rate
My assessments of the MTBPS in October last year and the
moves until after the February 2018 Budget.
DOWNGRADE POSSIBLE WITHIN WEEKS Thus, the perceived abandonment of the policy of fiscal consolidation – especially the frightening picture of a continually rising debt burden – means that SA's local currency credit ratings will likely be cut to junk status within weeks. Multiple downgrades within the next six to 12 months are very likely. This, despite the Minister’s promises recently to do everything he can to avoid further downgrades.
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