SA may be fairly healthy but more trans­parency is re­quired

Finweek English Edition - - Column -

YOU COULDN’T HELP a small twinge of sat­is­fac­tion when Greece’s debt was down­graded to junk sta­tus – be­low South Africa’s in­vest­ment grade sta­tus. Our fis­cal sit­u­a­tion is much health­ier than that of the PIGS – Por­tu­gal, Italy, Greece and Spain. How­ever, that’s not say­ing much, as the PIGS are in dire straits.

Let’s take a new look at SA’s “con­sol­i­dated Govern­ment fi­nances”. It’s nar­row: it’s na­tional and pro­vin­cial govern­ment, as well as so­cial se­cu­rity funds, such as the Un­em­ploy­ment In­surance Fund. A new look at con­sol­i­dated govern­ment fi­nance – which is the head­line fig­ure re­ported in news­pa­pers – will find the sit­u­a­tion much im­proved from the Fe­bru­ary Bud­get. A late wind­fall in rev­enue en­sured the Bud­get deficit for the 2009/2010 fis­cal year is now no longer 7,3% of gross do­mes­tic prod­uct but 6,8%. Though still much higher than the orig­i­nal Bud­get, it’s psy­cho­log­i­cally im­por­tant the 7% level wasn’t breached.

What the rev­enue wind­fall also means is that the in­crease in rev­enue for the fis­cal year that started in April is cal­cu­lated off a higher base. That means the 12,6% in­crease bud­geted for the 2010/2011 fis­cal year will yield a higher rand value for rev­enue. It fol­lows that the Bud­get deficit will be smaller (the deficit is the dif­fer­ence be­tween spend­ing and rev­enue). This pat­tern of higher rev­enues con­tin­ues into fu­ture fis­cal years, as each in­crease is com­ing off a higher base. So for the three-year pe­riod of the Bud­get, the deficits will be smaller than those an­nounced in Fe­bru­ary.

Rand Mer­chant Bank says that, as­sum­ing Govern­ment’s rev­enue growth as­sump­tions re­main un­changed, the con­sol­i­dated Bud­get deficit then de­clines to 5,8% of GDP in 2010/2011 and to 3,7% of GDP in 2012/1013 (the last year in the medi­umterm frame­work). That com­pares favourably to the 6,2% and 4,1% pro­jected in the Bud­get. But RMB be­lieves rev­enue growth could be even stronger, given that the bank is ex­pect­ing higher GDP growth than Govern­ment. RMB says ap­ply­ing the same rev­enue-to-GDP mul­ti­pli­ers Govern­ment has as­sumed the Bud­get deficit pro­jec­tions for the cur­rent and past fis­cal year in the medium-term frame­work be­come even more op­ti­mistic at 5,5% of GDP and 3,5%.

But that all as­sumes one thing: that Govern­ment doesn’t over­spend. And that’s a pretty big as­sump­tion. RMB says there’s a risk the deficit out­comes will be the same as in the orig­i­nal Bud­get, be­cause Govern­ment will over­spend. The over­spend­ing will be “masked” by higher rev­enue than orig­i­nally bud­geted.

Still, this is far from a Greek tragedy. How­ever, when you look at the pub­lic sec­tor bor­row­ing re­quire­ment (PSBR, which in­cludes State-owned util­i­ties, such as Eskom and Transnet) the pic­ture is a lot less rosy. The pub­lic sec­tor bor­row­ing re­quire­ment is Bud­geted at 11,1% of GDP in 2010/2011, 8,8% in 2011/2012 and 7,1% in 2012/2013. In the most re­cent fis­cal year it was a whop­ping 11,8% of GDP – not that far off Greece’s bud­get deficit of more than 13% of GDP.

But it must be noted these fig­ures will also have been af­fected by the higher rev­enue col­lec­tion at na­tional Govern­ment level. Cur­rently, the Trea­sury only plans to re­vise all fig­ures in Oc­to­ber’s miniBud­get. How­ever, given the cur­rent in­ter­na­tional con­cern with bud­get deficits an ear­lier re­vi­sion and an­nounce­ment would make sense.

Re­vised or not, SA’s PSBR is high – though not in the PIGS’s league. More im­por­tantly, SA’s high deficit was in­curred at a time when Govern­ment debt was low. Govern­ment’s net loan debt (that is, ex­clud­ing its cash bal­ances) was only 28,2% of GDP in the 2009/2010 fis­cal year. Greece’s was 115%. SA’s net loan debt will be less than 40% in 2012/2013.

But that’s also a bit mis­lead­ing, be­cause it doesn’t in­clude pub­lic sec­tor debt. And as we have seen with Eskom, it can hap­pen that falls on the shoul­ders of the tax­payer. It would be more trans­par­ent to show pub­lic sec­tor debt as a per­cent­age of GDP. Though SA’s fis­cal po­si­tion seems healthy, a bit more trans­parency is re­quired.

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