Budget: SA living on borrowed time

FINANCE Minister Tito Mboweni and the government he serves are increasingly living on borrowed time.

In the absence of growth-enhancing policy reforms and fiscal prudence, SA remains vulnerable to an external shock. This is our overriding sense of the country’s economic circumstances after the 2021/22 National Budget was tabled in Parliament last week.

Here we identify the risks of South Africa’s deteriorating fiscal position.

Revenue collection was buoyed somewhat by a favourable international environment, with increased global demand for commodities, boosting domestic mining firms’ earnings.

Consequently, the government collected revenue of R1.3 trillion in 2020/21 – R99.6 billion more than it projected in the Medium-Term Budget Policy Statement (MTBPS) of October.

Treasury now expects to collect R1.5 trillion in 2021/22. However, our sense is that collections will diminish over the medium-to-longer term, owing to a low domestic growth outlook, and a shrinking tax base (exacerbated by skills and capital flight).

Meanwhile, consolidated expenditure continues its upward trajectory, with government spending set to rise to R2.02 trillion in 2021/22, and to stabilise at R2.09 trillion in 2023/24, but Treasury projections tend to suffer from over-optimism.

The minister was quick to note that “this is not an austerity Budget”but he is seeking to reduce expenditure by R264.9 billion over the medium term. We doubt this will happen, given the government’s reluctance to reduce the size of the public service, which has ballooned. Our reasoning is simple: cadre deployment is a centrepiece of government policy, but it would not work if cadres were to be retrenched.

Turning off the money taps would disrupt the internal unity of the party.

The budget deficit is projected to recover somewhat from the enormous post-Covid deficit of -14% in 2020 to (still large by historical standards) -9.3% in 2021. To finance the deficit, government borrowing will continue to surge to record-high levels.

Sovereign debt is projected to reach 81.7% of GDP in 2021/22 and to rise significantly to 87.3% in 2023/24. Recall that debt-to-GDP levels were at 63.3% in the 2019/20 Budget.

Debt service costs now amount to R269.7 billion or 13.3% of expenditure (meaning the government now spends more on debt payments than on the entire national health budget).

The minister made much of plans to invest R791.2 billion in a government-led “infrastructure investment drive” – but this is no panacea for low growth. Only substantive reforms to the labour market and empowerment policy will lead to growth, but these will not be forthcoming.

We caution that a watchful eye be kept on imminent amendments to Regulation 28 of the Pension Funds Act. As the government runs out of money, this may be a way for it to quietly introduce asset prescription through the back door.

The deterioration in the fiscus is unlikely to dissuade foreign investors hungry for high-yield emerging market bonds. Given that yields are low in the developed world, and that SA’s budget deficit is relatively cheap in US dollar terms, investors will continue to buy South African government bonds.

This could provide an artificial boost to the rand, likely to hold its current levels short-to-medium term (but our medium-to-longer term rand outlook remains one of sharp weakening). Overall, our sense from the Budget is that, in the absence of policy reform and fiscal prudence, the government is increasingly living on borrowed time.