Economic growth is undermined by a lack of fiscal prudence
The “lack of fiscal prudence” indicated in last week’s medium term budget, will undermine economic growth, credit ratings agency Moody’s said on Monday.
In a research report responding to the medium term budget policy statement announced by finance minister Malusi Gigaba, the ratings agency said the absence of fiscal consolidation was “credit negative”.
The report does not constitute a ratings decision, but it is likely to reinforce fears that South Africa’s sovereign credit rating will be downgraded further by Moodys, which rates the country at Baa3 with a negative outlook.
The agency highlighted the declines in tax revenue and the resultant widening of the budget deficit and growing debt burden as a key dilemma.
Gigaba revealed that tax revenues would fall short by R50,8-billion for the 2017/18 financial year, and by a further R69.3-billion and R89,4-billion in the following two years.
The Treasury said the budget deficit would widen to 4.3% of GDP, up from the 3.4% expected in this year’s February main budget.
“As a result, the National Treasury now expects accelerated accumulation of public debt, and expects public debt to GDP to exceed 60% of GDP by fiscal 2021, a notable departure from the debt stabilisation objective outlined in the February budget,” said Zuzana Brixiova, the lead sovereign analyst for South Africa.
At the same time that the government’s debt burden will increase, the cost of borrowing has risen, she noted, with interest payments reaching 15% of revenue by the 2020/21 financial year. This exceeds the 9.8% median of similarly rated peer country’s, according to Moody’s.
“In our view, at this level, the cost of debt servicing is crowding out pro-growth expenditures while raising mandatory recurrent spending,” Brixiova said.
The absence of fiscal consolidation efforts, in terms of containing the deficit and reducing recurrent spending, undermined debt sustainability, as well as the government’s ability to provide fiscal stimulus, in the event of a negative economic shock, she noted.
Fiscal risks from rising debt levels were exacerbated by the continued increase in government guarantees provided to state owned enterprises.
This was the first MTBPS in the past several years that did not have the objective of fiscal consolidation, she noted, which was “a setback to already feeble business confidence and growth”.
“In our view, unless the government presents a credible fiscal consolidation plan in the February 2018 budget, debt sustainability is at risk,” she said.
Given the declining revenue forecasts, most of the adjustment would need to come from government expenditure.
But Brixovia warned that this “will be challenging to achieve amid rising spending pressures in the run up to 2019 elections”.