Fitch: Weakening Growth Compounds South African Fiscal Challenge
Wednesday's MTBPS included a marked downward revision in economic growth prospects with a knock-on adverse impact on projections for the budget deficit and government debt/GDP in the medium term, which the government did not seek to offset with fiscal policy tightening.
The National Treasury cut its GDP growth forecast to 1.5% for 2015 (2.0% in February's budget), and to 1.7% in 2016 (2.4%) and 2.6% in 2017 (3.0%). The revisions reflect electricity supply constraints, falling commodity prices and weak confidence.
Falling growth forecasts have recurred in recent years. Government growth projections for 2015 have dropped by 1.7pp and for 2016 by 1.8pp of GDP since February 2014; while the National Development Plan's target of 5% GDP growth by 2019 looks a long way out of reach.
The suspension of relief on Unemployment Insurance Fund contributions (soon after February's budget) worth 0.4% of GDP means the National Treasury marginally lowered its forecast for the consolidated budget deficit for FY2015/2016 to 3.8% from 3.9%. It has also counted ZAR25.2bn (0.6% of GDP) of receipts from asset sales to fund the recapitalisation of Eskom and its contribution to the New Development Bank as above-the-line revenue rather than a financing item.
The weaker growth outlook will reduce gross tax revenues by ZAR7.6bn in FY2015/2016 and a cumulative ZAR35bn over three years. The Treasury has therefore revised up its forecasts for the consolidated budget deficit to 3.3% of GDP in FY2016/2017 (from 2.6% in February's budget) and 3.2% in FY2017/2018 (from 2.5%). It announced a new forecast of 3% for FY2018/2019.
These are more realistic (they are closer to our deficit forecasts), but the combination of larger budget deficits and lower nominal GDP will keep public debt rising. The Treasury has increased its projections for gross national (central) government debt, predicting a rise from 46.8% of GDP in FY2014/2015 to 49.0% of GDP in FY2015/2016, reaching 49.4% by FY2018/2019.
Minister of Finance Nhlanhla Musa Nene reaffirmed the objective of stabilising government debt/GDP and the government's commitment to the nominal expenditure ceiling for primary central government spending, which it has met since 2012. He also proposed a new fiscal guideline to link the expenditure ceiling to long-term economic growth.
But government spending is forecast to grow by 7.2% a year over the medium term, above inflation. Debt interest costs are the fastest-rising component. This year's wage settlement will lead to spending on salaries above February's budget projections by a cumulative ZAR63.9bn for the next three years. Nearly two-thirds will be covered from the contingency reserve, meaning the government has very little margin to cope with unexpected spending pressures and events.
Nevertheless, Minister Nene did not announce any new tax measures. The MTBPS says "opportunities to mobilise additional revenue remain limited and will be explored cautiously", although over the medium-term the government will explore reforms that "promote an efficient progressive tax system".
Growth and the outlook for the public finances will form an important part of Fitch's next review of South Africa's sovereign ratings, scheduled for 4 December. We affirmed South Africa's rating at 'BBB'/Negative on 5 June.