Can SA maintain fiscal rebalancing, Fitch asks

A robust economic recovery and better-than-forecast tax collection have boosted SA’s chances of achieving its fiscal consolidation aims, Fitch Ratings said, even as it warned this might not be sustained.

And the conditions have not created space for the government to meet new demands for increased spending.

In a statement issued on Tuesday, Fitch, which rates SA sovereign debt three notches into subinvestment grade with a negative outlook, said it had raised its forecast for economic growth in 2021 to 5.3%, almost one percentage point higher than the SA Reserve Bank’s forecast from July, and from 4.9% previously.

The central bank is in the middle of a policy meeting, and new growth and inflation forecasts are due on Thursday when it decides on interest rates.

The ratings company warned, however, that despite the improved fiscal outlook, SA “will continue to face substantial challenges as it seeks to stabilise debt” by the 2025/2026 fiscal year. These include pressure to increase social spending in the form of a basic income grant, something that gained momentum after the looting and riots in July, and the funding requirements of struggling state-owned enterprises such as Eskom.

The statement comes ahead of finance minister Enoch Godongwana s medium-term

policy’ budget statement early in November, which will take place just days after the local government elections.

SA’s finances, stretched by the biggest economic slump in a century as a result of Covid-19, were granted a reprieve by a tax revenue windfall fuelled by booming commodity prices. Some of the windfall — R33.85bn

— has already been allocated to relief and recovery efforts after the violent looting in KwaZuluNatal and Gauteng.

The government’s consolidated budget deficit is still likely to be “significantly smaller” than the 9.3% projected in the February budget, said Fitch.

The fiscal position has also been helped after SA rebased its GDP data in August, which revealed the economy was 11% larger than previously measured. This lowers the government’s debt-to-GDP ratio — a key metric watched by ratings agencies to assess a country’s financial health — to 79.3% for the 2020/2021 fiscal year from the previous estimate of 82.5%. Nevertheless, it still leaves SA well above the 2020 median for “BB” sovereigns of 59%, according to Fitch.

“Moreover, the revision itself will not affect the direction of debt going forward,” the agency said. Even if the deficit is lower than anticipated in 2021/2022, “it is unclear whether this outperformance will be sustained”.

Fitch cited uncertainties such as pressure to raise social spending in the form of a basic income grant, which may not be fully covered by increased revenues over the long term. Though a recent deal with public sector workers was lower than Fitch estimated, alleviating nearterm budget pressures, the fact that it covered only one year left

room for conflict and slippage later on. “This leaves greater uncertainty over the mediumterm path of spending.”

Though the recovery has been better than expected, July’s riots and tougher lockdown restrictions are expected to drag down economic growth in the third quarter.

The Bank’s leading business cycle indicator, a gauge of the economic growth cycle for the next six to 12 months, declined to a five-month low in July. Nine out of the 10 components that make up the series declined, data showed on Tuesday.

The Bank’s data showed that SA remains in a downwards phase of the business cycle and the effects of July’s unrest will stretch into next year, Investec chief economist Annabel Bishop said in a note. The run-up to the elections will be a risk to business confidence, said Bishop, particularly as some political parties take aim at the ANC’s efforts to rebuild confidence.

THE CONSOLIDATED BUDGET DEFICIT IS STILL LIKELY TO BE ‘SIGNIFICANTLY SMALLER’ THAN THE 9.3% PROJECTED IN FEBRUARY