SA’s recovery from the coronavirus pandemic and the lockdown restrictions implemented to help curb its spread will be slow and difficult, with the state unlikely to meet the ambitious targets it has set itself to right its already weak finances.
This is the view of Absa’s SA macroeconomics team, which expects that the budget deficit will reach 16.6% of GDP as revenues crater due to shrinking economic growth and as the state struggles to deliver on the extensive cuts to spending — notably wages — promised in February’s national budget.
Absa’s forecast is higher than the 14.6% that finance minister Tito Mboweni announced for the main budget deficit in the special supplementary budget. Mboweni also outlined an additional R230bn in spending cuts over the next two years, on top of the R160bn in cuts to public service pay announced in February.
But the pay reductions face fierce resistance, with public sector unions taking legal action over the state’s refusal to implement the final round of annual wage increases promised in the most recent multiyear wage agreement. These were supposed to come into effect in April.
Absa argues that the state is unlikely to win this legal battle, which will mean the government will have to spend an additional R37.8bn this year, on top of added Covid-related spending.
Mboweni will be unable “to deliver on all the spending cuts”, said Absa senior economist Peter Worthington at a briefing on Tuesday.
“We think that there is just not sufficient political space to deliver on that,” he said, adding that Absa expects Mboweni will manage only half of the planned cuts announced. “The fiscal deficit trajectory that we are likely to see ... is not going to be sufficient to stabilise debt in the near term,” said Worthington.
Extensive scepticism
The bank expects the state’s debt levels will reach 84.6% of GDP this fiscal year and rise to 97.4% of GDP by 2023/2024, which is also higher than the Treasury’s forecasts of 81.8% this year and 87.4% by 2023/2024.
The state is likely to find it “politically and socially untenable” to unwind the R50bn temporary expansion of social grants, which formed part of the government’s R500bn economic response package and which are due to end in October, the bank said.
However, given the uncertainty about it, this spending is not factored into its deficit forecasts.
There is extensive scepticism, not least from all three ratings agencies (Moody’s Investors Service, Fitch Ratings and S&P Global Ratings), that the state can deliver on the promises to right its finances, despite this being a key commitment made to the IMF in exchange for accessing $4.3bn through its rapid financing facility.
In signing its letter of intent to the IMF, Mboweni undertook to rein in ballooning government debt, including the consideration of a debt ceiling — or rule to limit how much debt the government can take on. He also undertook to rationalise poorly run, inefficient state-owned enterprises (SOEs).
Further detail on the cuts will be provided in the October adjustments budget, with more detail on long promised but contested structural reforms.
Though Absa has revised its GDP forecast for this year to a contraction of 8.3% from a previous 9.7%, thanks so some better-than-expected data from the first and second quarters, the recovery in the second half of the year is likely to be weighed down by extended lockdown measures and more disruptions from localised Covid-19 outbreaks, it said.
It forecasts a recovery in growth of 2.4% for 2021 and about 1.5% for 2022.
If more adverse developments take place — including the failure to implement the needed spending cuts; a failure of the structural reform agenda; and slow development of the government’s infrastructure drive — the bank foresees a much slower recovery.
Under this scenario SA’s looming debt crisis could come to the boil and force the state into a fully fledged IMF programme with more severe conditionality, it warned.
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