The FM’s cover story this week suggests there is more resilience in the personal income tax (PIT) tax base, and greater buoyancy of real earnings in the economy, than many believe. It implies that there may be an upside revenue surprise over the next few years, which would raise the odds of fiscal consolidation being achieved.
While the suggestion that the National Treasury is probably being too conservative in its PIT revenue assumptions is encouraging, it’s unfortunately not the revenue side of the fiscal framework that everyone is most worried about.
Slippage is most likely to occur on the expenditure side. In this concern, S&P Global Ratings, Fitch and Moody’s are all united, as are most South African economists.
S&P’s recent ratings review, though fair and balanced, refuses to swallow the government’s line that the debt ratio will stabilise in the next two years as a result of significant cost-cutting and restructuring in the public sector, including huge implied retrenchments.
Though S&P has affirmed South Africa’s BB- credit rating and “stable” outlook, and even expects the economy to grow slightly faster than the Treasury does, its views on the likely path of the debt trajectory diverge markedly from the government’s.
With growth set to remain tepid, and interest rates set to remain higher for longer, it is highly unlikely that the fiscal position will stabilise as promised
S&P expects the debt ratio to hit 83% of GDP by March 2027 — about five percentage points higher than the Treasury’s estimate, which has debt stabilising at 77.7% of GDP a year earlier. S&P expects debt to keep climbing on lower revenue due to softening commodity prices, and rising spending pressures from the wage bill, weak state-owned entities (SOEs), the social relief of distress (SRD) grant and debt service costs.
A year ago, S&P highlighted four main risks to South Africa’s expenditure outlook: that public sector wages would settle higher than provisioned; that the SRD grant would be further extended or made permanent; that SOEs would require further support; and that borrowing costs would be higher than projected.
All four of these fears have materialised, causing the country to overshoot its debt targets and the Treasury to slam the brakes on spending. But the recent medium term budget policy statement again makes an unrealistic, below-inflation provision for medium-term wage bill growth and pencils in nothing new for SOE bailouts, even though the latter typically run to R24bn a year.
So the odds are high that the expenditure side of the budget will blow out yet again, even if the revenue side holds up better than expected. And with growth set to remain tepid, and interest rates set to remain higher for longer, it is highly unlikely that the fiscal position will stabilise as promised.
So why didn’t S&P downgrade the outlook on South Africa’s sovereign rating from “stable” to “negative”? It says it’s because the country’s credit weaknesses (infrastructure-related pressures on growth, and downside risks to the debt position) are roughly offset by its strengths (including a credible central bank and deep domestic capital markets).
S&P thinks there is still room for local banks to keep absorbing additional government debt and for the government to increase concessional financing from multilateral institutions. In other words, the risk of an imminent funding crisis would appear limited, because we can just keep borrowing.
But for South Africans with longer-term horizons (and little belief in the prospect of a growth revival) that is not particularly comforting. The local bond market may be deep, but it is not bottomless. It can also be fickle. This is something the country will no doubt discover when the debt ratio pierces the psychological 80% barrier. South Africa may be ranked three notches deep into junk already, but that doesn’t mean there isn’t further to fall.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.