MTBPS Measures Will Not Stem Rising Debt: Fitch

saeconomyjune14sqSubstantial tightening measures worth 0.5% of GDP in 2017-2018 in South Africa’s (‘BBB-‘/Stable) Medium-Term Budget Policy Statement (MTBPS) highlight that fiscal consolidation remains a government priority but will be insufficient to avoid a further delay in stabilising debt to GDP ratios given low economic growth, Fitch Ratings says.

The government revised its forecast for the 2016-2017 fiscal year national government deficit to 3.4% of GDP from the February budget projection of 3.2%. The adjustment reflects slower than expected revenue growth as a result of weaker GDP growth and lower tax buoyancy (i.e. a slower increase in revenues for a given rise in GDP), following disappointing tax data for the first five months of 2016-2017. The budget deficit is now projected to fall to 3.1% in 2017-2018 and 2.7% in 2018-2019, up from 2.4% in the budget. The MTBPS adds the year 2019-2020 to the forecasting horizon, projecting a deficit of 2.5%.

The deterioration in the forecasts would have been more pronounced without new consolidation measures announced in the MTBPS. Notably, expenditure will be reduced by ZAR10bn in 2017-2018 and ZAR16bn in 2018/19. While the MTBPS cannot be used to propose specific tax changes, the government said it plans revenue-raising measures worth ZAR13bn for 2017-2018. These will be specified in next February’s budget, adding to the unspecified tax rises worth ZAR15bn in the February 2016 budget also to be implemented in 2017-2018.

This implies a total fiscal adjustment for 2017-2018 in the MTBPS of ZAR23bn or 0.5% of GDP. Consolidation for 2017-2018 in the MTBPS and the 2016 budget amounts to ZAR48bn, or 1% of GDP.

However, the adjustments will not contain the rise in gross loan debt (excluding local governments). The government now expects this to peak at 53% in 2018-2019 – 2pp higher and a year later than forecast in the 2016 budget.

Poor economic performance remains the main impediment to debt stabilization, but government measures to boost trend growth performance constitute fine-tuning rather than meaningful reform. Structural reform measures highlighted in the MTBPs, such as efforts to reduce legal uncertainty in the mining sector or improved visa processing, will not be sufficient to raise business confidence substantially in the near term, although progress has been made on alleviating electricity shortages, a key factor that had held back growth in recent years.

The next budget, which will need to specify ZAR28bn of revenue raising measures to be implemented in 2017-2018, will come at a sensitive time. The ANC electoral conference at the end of the year will choose the presidential candidate ahead of the 2019 national election. Positioning by potential candidates, as well as concerns following the poor showing of the ANC in local elections in August, may make unpopular tax measures politically difficult and heighten pressure for additional spending.

Continued fiscal consolidation measures over the last four years have greatly reduced the scope to create fiscal space by re-prioritising expenditure, although the government was able to accommodate an increase in spending on university fee subsidies in response to large-scale student protests by shifting budget allocations in the MTBPS.



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