DOWNHILL FROM HERE

Sais teetering on the brink of a fiscal cliff. Should populist policies prevail, low growth and rising debt could be the country’s undoing

SA has entered an unsustainable debt spiral and the only way out is through improved confidence and higher growth — two elements that are being held hostage to the deteriorating political climate.

The fiscal noose the country has made for itself is tightening. Next month at the midterm budget review a projected revenue shortfall of about R44bn for the 2017 fiscal year is likely to be announced. Unless finance minister Malusi Gigaba responds by lowering the expenditure ceiling and announcing progrowth reforms, SA likely faces further ratings downgrades early next year.

This is the message contained in a hardhitting report released last week by Nedbank Corporate & Investment Bank research analyst Reezwana Sumad. It was followed closely by an equally dispiriting research note from Moody’s ratings agency.

Its commentary was in response to the recent revelation by Stats SA that poverty is deepening. As of 2015, one in four South Africans (25.2% of the population) lived in extreme poverty of less than R15/day, up from about one in five (21.4%) in 2011.

Moody’s also noted that SA’S levels of poverty, unemployment and inequality are higher than those in most other emerging markets, with 40% of the poorest households receiving only 8% of the country’s annual income (see table).

Zuzana Brixiova, Moody’s lead sovereign analyst for SA, fears that pressure to increase public spending in response to rising poverty and unemployment will complicate fiscal consolidation and challenge the state’s reform commitment in the run-up to the 2019 elections.

Government’s commitment to difficult, less-popular reforms aimed at promoting growth and consolidating public finances is already weakening, she says. At the same time, she warns that the ANC’S “radical economic transformation” policy agenda includes several measures, like land expropriation, that could deter investors.

“We expect that a continued stalemate on structural reforms in the lead-up to ANC leadership elections will also continue to depress already-weak business confidence, impeding any meaningful rebound from its current 32-year lows,” she says.

The danger is that any slowdown in fiscal consolidation as a result of increased social spending would further weigh on business confidence, deterring investment and weakening longer-term growth.

When Moody’s downgraded SA’S sovereign ratings to the cusp of junk in June, it warned that the country could lose its investment-grade rating if its economic and fiscal strength continued to falter.

It singled out the danger that pro-growth reforms might be further delayed and that liquidity pressures could emerge at stateowned enterprises (SOES) requiring government intervention, further eroding SA’S fiscal position.

Both these risks are now being realised, with the broader SOE reform process having stalled, Eskom in ongoing disarray, and SA Airways in need of a further R10bn bail-out.

The full extent of SA’S looming fiscal crisis will be laid bare in the medium-term budget next month.

There have been revenue shortfalis in four out of the past five fiscal years, mainly as a result of disappointing economic growth. The cumulative shortfall is about R60bn. Last year’s shortfall was R30bn — the worst revenue performance since the global financial crisis.

So far this fiscal year, tax revenues have grown at just 6.7% against treasury’s target of 10.6%, weighed down by slower personal and corporate income tax collection. If this growth rate is maintained, there will be a R44bn shortfall in revenue collection by the time of the February 2018 budget.

What it means: SA’S fiscal crisis is deepening, with Moody’s warning against ‘radical economic transformation’