Fiscal gap expected t0 widen as SOEs sap resources

Billions of rands in bailouts for Eskom will probably widen the budget deficit to the biggest since the financial crisis, threatening the nation’s remaining investment-grade credit rating.

With the National Treasury’s medium-term budget due for release toward the end of the month, economists in a Bloomberg survey expect a fiscal gap of 6.1% of gross domestic product for this year as money for Eskom, the SABC and South African Airways saps resources. That’s compared with the Treasury’s 4.5% February estimate and would be the biggest gap since 2010.

Power shortages and policy uncertainty have damped economic growth and plunged business confidence to multi-decade lows, while the revenue service has struggled to meet tax estimates. Finance Minister Tito Mboweni reiterated in July that the bailouts will come at a cost to taxpayers, who have faced a series of tax hikes since 2015, including the first increase in VAT since 1993.

South Africa’s R128 billion three-year package for Eskom will add to state liabilities and widen the deficit, Moody’s Investors Service said last month. It’s the only major ratings company that still assesses the country’s debt at investment grade.

The utility has R450 billion of outstanding debt.

“The sheer scale of Eskom’s debt is daunting,” President Cyril Ramaphosa said yesterday in a weekly letter to the nation. “Further bailouts are putting pressure on an already constrained fiscus,” he said, adding that support for the power company is dependent on “stringent conditions”.

Analysts are speculating that Moody’s may cut the stable outlook on the Baa3 rating to negative because of rising debt and lower economic growth projections, putting the country on the verge of another junk rating.

Mboweni’s policy statement needs to “send a signal to rating agencies that the state remains committed to fiscal consolidation”, said Jeffrey Schultz, a senior economist at BNP Paribas South Africa. The economy needs noninterest spending cuts of more than 2% of GDP to stabilise debt metrics “today”, although a 0.5% reduction within a solid macroeconomic plan would make for a credible budget, he said.

Failure to narrow the budget gap could raise debt, including guarantees to Eskom, to more than 70% of gross domestic product in the medium term, said Moody’s. Fitch Ratings sees state debt increasing to 68% of GDP by 2021-22 from about 56% now, it said in July.