Gigaba budget averts ratings bust but fiscal cliff still looms
As debt-to-GDP ratio slips, debt default is possible, pundits say
● Finance Minister Malusi Gigaba’s 2018 budget may have staved off a potential credit ratings downgrade next month but it has done little to quash concerns that South Africa is edging towards a fiscal cliff.
“We are one step closer to the fiscal cliff, we are incrementally more fragile than we were a year ago,” George Glynos, MD of ETM Analytics, said.
“It takes a long period of time to degrade your fiscal quality to the point where you no longer have a fiscal buffer. At the point where you have no fiscal buffer you leave yourself vulnerable . . . and then you go into a fullblown default situation.”
Glynos said there had been no perceptible improvement in the debt-to-GDP ratio over the past four to five years, which had started out at 25% at the end of Trevor Manuel’s tenure as finance minister, when former president Jacob Zuma began his term.
Under the five ministers that have followed, the ratio has risen to above 50%.
In the latest forecast, the Treasury has revised the ratio to 56% by the 2022-23 financial year from 60% forecast in the mediumterm budget policy statement in October.
Greece, the poster child for debt default, has a debt-to-GDP ratio above 180%. South Africa, like other emerging-market nations, has a tipping point much lower.
“Anything towards the 60% mark or north of that is danger territory,” Glynos said.
Despite misgivings such as Glynos’s, ratings agencies were complimentary and positive sentiment lifted the currency.
Gigaba announced R85-billion in spending cuts and tax increases of R36-billion, which included a VAT hike — one percentage point — for the first time in decades. The budget deficit over the next two years has been revised down to 3.6% from 4.3% and 3.5% in the final year of the medium term on Treasury assumptions of economic growth of 1.5% in 2018 and higher in later years.
The reality, however, is that total expenditure for the coming year is R1.67-trillion, which represents a 2% real growth in expenditure, says David French, tax consulting director at Mazars.
“South Africa has been steadily increasing its spending levels for a number of years now, and we haven’t seen it having any positive effect on the economy,” French said.
On Thursday Gigaba hinted at the seriousness of the fiscal situation when he told parliament’s select committee on appropriation and finance that the government would have found itself at the mercy of multilateral finance institutions had tough measures not been taken. These measures had the least impact on growth, he said. “We are confident we will be able to maintain discipline on the part of government.”
Yet given a history of the Treasury’s outof-sync growth forecasts, some economists remain sceptical. There is the need to balance consolidation against socialist ideals such as the promise of free higher education, which will cost R57-billion over the next three years. Higher education will be the Treasury’s fastest-growing item of expenditure, exceeding interest on government debt, which stands at more than R2-trillion.
Gina Schoeman, Citibank SA economist, said structural reforms were necessary as early as the second half of this year to retain market euphoria about improvements in the government’s efficiency. But she added the state was unlikely to cut expenditure significantly ahead of elections.
“A big disappointment was compensation of employees.” The Treasury projects it to grow 7.3% over the next three years.
Schoeman said wage negotiations that yield a result of CPI + 2.2% could be negative for the salary bill. An outcome of CPI + 0.5% would result in a saving by the time of the medium-term budget in October. This is dependent on political will, leadership and was difficult to achieve in an electoral cycle.
Ravi Bhatia, director of sovereign ratings at S&P Global, said: “The [budget] plan looks broadly credible, but the question is whether it can be effectively implemented. It will largely hinge around whether growth comes in line with their expectations, thereby providing the projected revenues, and if they simultaneously managed expenditure cuts.
“While fiscal control is one aspect, a lot depends upon whether GDP growth will be
SA has been steadily increasing its spending levels David French Tax consulting director at Mazars
It remains to be seen how fiscal policy will evolve Fitch Credit ratings agency
in line with their expectations. There were not many structural reforms highlighted in the budget, but we understand there are plans to address structural issues subsequently. Our foreign-currency ratings currently stand at BB, with a stable outlook.”
The outlook means that the current rating is expected to be maintained for the foreseeable future but it’s not indicative of a view that things may improve.
Moody’s declined to comment.
Fitch said on Friday: “South Africa’s budget reverses some of the fiscal deterioration seen in 2017. However, the need to fund expenditure measures announced in recent months means the consolidation envisaged is relatively modest. It remains to be seen how fiscal policy will evolve under President Ramaphosa in the face of persistent risks to fiscal targets.”
In a report published on Friday, S&P said South Africa would be the largest borrower among sub-Saharan countries in 2018.