South Africa’s debt still rising despite higher revenue
South Africa’s budget confirms that stronger fiscal revenue has led to an improvement in public finances, says Fitch Ratings. However, continuing breaches of expenditure ceilings point to difficulties in containing spending, and there is a risk that recent strong revenue growth may prove temporary.
Improved fiscal performance had already contributed to Fitch’s decision to revise the Outlook on South Africa’s ‘BB-’ rating to Stable, from Negative, in December 2021.
The budget presented on 23 February shows the consolidated government deficit for the fiscal year ending March 2022 (FY21/22) at 5.7% of GDP, narrower than the 7.8% in the Medium-Term Budget Policy Statement (MTBPS) in November 2021 and our forecast at the time of the December review of 7.7%. The budget projects further consolidation to a deficit of 4.2% in FY24/25, compared with 4.9% in the MTPBS.
The new forecasts reduce the near-term risk that investor concerns about debt sustainability could lead to a further surge in borrowing costs in the context of global monetary tightening, and imply a further slowdown in debt accumulation. However, officials still expect debt to continue rising, to a peak of 75.1% in FY24/25 (MTBPS: 78.1%), and risks to the government’s expectation of debt stabilisation remain high.
The better budget numbers reflect faster-than-expected growth in fiscal revenue (up by 22%) for FY21/22. High international prices for South Africa’s export commodities have boosted the mining sector and thus corporate tax receipts.
Read: Economic indicators signal diminished growth momentum at start of year
Government forecasts for revenue growth in subsequent years are prudent, with a below-inflation rise of 2.9% in FY22/23, but if commodity prices fall, a contraction in revenue cannot be excluded.
In light of above-target revenue growth, the government plans to extend the social relief of distress grants (SRD), worth ZAR350 (USD23) a month to recipients, by another year to March 2023, at a cost of around 0.7% of GDP. Other measures raised spending by a further 0.5% of GDP.
So far, the government has resisted pressure for a more comprehensive basic income grant, which would be significantly more expensive. We expect some form of social grant to be made permanent, given pressures from exceptionally high income inequality, unemployment that surged to 34.9% in 3Q21 and strong pressures for more social spending in the governing ANC.
This means the government will again breach its expenditure ceiling in FY23/24 as a result of the SRD grant extension. These ceilings on non-interest expenditure, announced three years ahead, were introduced in 2012 and had been adhered to until FY19/20.
That major overshoot, due to bailouts of state-owned enterprises, was followed by breaches in FY20/21 and FY21/22 driven by the Covid-19 pandemic (which caused disruption to public finances in many countries) and in FY22/23 due to the SRD.
Although we anticipated the breach this year, it raises questions about the government’s ability to pursue fiscal consolidation if revenue forecasts disappoint or other fiscal risks materialise. Its fiscal consolidation strategy relies on containing public-sector wages, which have grown strongly in the past decade.
While there are still risks from a pending constitutional court ruling, the government has been relatively successful in containing wage growth during the pandemic, but the recovery in economic growth and stronger public finances may make the public-sector wage negotiations due to start in March 2022 tougher. Unexpected additional needs to provide fiscal support to state-owned enterprises could also put upward pressure on debt.
A more durable resolution of South Africa’s fiscal challenges in a difficult socioeconomic context would require a substantial acceleration of economic growth. So far, government initiatives and progress on implementation has been insufficient to make this likely.
