South Africa’s Prospects for Reaching Fiscal Targets Improve

Cyril Ramaphosa, South Africa President

South Africa’s Prospects for Reaching Fiscal Targets Improve

South Africa’s prospects for reaching fiscal performance targets has improved, says Fitch Ratings in a new report following the pandemic-induced pressure on the economy.

Robust economic performance and stronger-than-expected fiscal revenue in recent months mean that South Africa’s budget deficit in the fiscal year ending March 2022 will be smaller than the government’s projections in February 2021, the Rating agency said.

Nevertheless, it noted that the government will continue to face substantial challenges as it seeks to stabilise debt by the fiscal year 2025/26. Economic growth in 2Q 2021 was stronger than we had expected at 1.2% quarter on quarter and Fitch noted that the government has also revised up earlier quarterly growth rates.

The August 2021 manufacturing purchasing managers’ index (PMI) and mobility data point to a strong recovery in activity following disruption in July caused by the most serious riots in decades.

Reflecting recent developments, Fitch analysts said they have raised the forecast for economic growth in 2021 to 5.3% from 4.9% previously.

Meanwhile, inflationary pressures appear manageable, with year on year consumer price inflation falling to 4.6% in July, close to the 4.5% mid-point of the central bank’s target range.

“We believe interest-rate hikes over the coming years, and thus upward pressure on interest expenditure will remain relatively contained”. Fiscal revenue has also grown strongly, increasing by 54% year on year for the first four months of the fiscal year 2021/22.

Fitch stated that central government revenue growth during the period was boosted by the low base in 2Q 2020 – when activity and tax collection were badly affected by a strict lockdown – and will come down in the coming months.

Notably, revenue from mining, which has been strong in recent months, will slow as the commodity price environment becomes less supportive. However, government revenue growth looks set to substantially exceed the 12.6% projected for fiscal year 2021/22 in the budget.

“The consolidated budget deficit is still likely to be significantly smaller than the 9.3% projected in the February budget, even though some of the fiscal leeway created by South Africa’s outperformance will be used by fiscal support issued following the riots (about 0.7% of GDP)”.

South Africa also revised its national accounts data in August, with 2020 nominal GDP now 11% higher than previously estimated.

This lowers the general government debt to gross domestic product (GDP) ratio for the fiscal year 2020/21 to 79.3% from 82.5%, though Fitch noted it remains well above the 2020 median for ‘BB’ sovereigns of 59%.

Moreover, the revision itself will not affect the direction of debt going forward, the rating agency added.

“When we affirmed South Africa’s rating at ‘BB-’ with a Negative Outlook in May 2021, we indicated that progress on fiscal consolidation that increases our confidence that government debt/GDP stabilisation will be achieved over the medium term could be a trigger for positive rating action”.

However, Fitch said even if the deficit is lower than anticipated in 2021/22, it is unclear whether this outperformance will be sustained. It noted that the deal with public-sector workers in August entails a slightly lower wage increase than we had assumed in May, alleviating budget pressures in the near term, but it covers only one year, whereas three-year deals had been the norm in the past.

“This leaves greater uncertainty over the medium-term path of spending”, it said.

Meanwhile, the social unrest in July has increased pressure on the government to raise support for the poor – pressure that could rise further if the ruling African National Congress (ANC) performs poorly in municipal elections in November.

The ANC leadership has agreed on the need for a basic income grant in principle, for example, although we believe its cost will make implementation unlikely in the next few years.

Higher social spending, if introduced, could be offset by revenue measures, but these might not fully cover expenditure, and could weigh on economic growth, Fitch noted.

South Africa’s Prospects for Reaching Fiscal Targets Improve