The government faces the tough task of balancing its economic recovery efforts with its plans to control spending in its upcoming medium-term budget policy statement (MTBPS), ratings agency S&P Global Ratings’ primary credit analyst for SA says.
"It seems to be more of a spending plan than a reform plan," S&P’s Ravi Bhatia told Business Day on Monday when reacting to the economic reconstruction and recovery plan announced by President Cyril Ramaphosa last week.
The plan focused on certain sectors and spending in key areas of the economy but it was less clear on how this would be financed and what effect it would have on the country’s fiscal metrics, said Bhatia, adding that it would be up to the MTBPS to provide this clarity.
The plan, which the government estimates could raise growth by 3% on average over the next decade, has at its core "high-impact" interventions, including a large employment stimulus package, an infrastructure drive and a pledge to accelerate energy generation and fast-track long promised reform measures.
In his address to parliament, Ramaphosa emphasised that the state would have to find a happy medium between the delivery of the recovery with the need to restore fiscal sustainability.
The plan has been met with mixed reactions from local commentators and analysts, with many warning that implementation, as well as more detail in its implications for the fiscus, will be critical to its credibility.
"I think it’s actually quite a hard task for the MTBPS — it will be a case of trying to get the balance right of trying to stimulate growth but at the same time keeping expenditure under control," Bhatia said.
Finance minister Tito Mboweni is due to deliver a delayed MTBPS on October 28, which will be closely watched for
detail on how Ramaphosa’s recovery package will inform SA’s fiscal framework.
The state’s financial position, which was already weak before the pandemic crisis, is acutely stressed with the consolidated budget deficit set to reach 15.7% this year and debt-to-GDP levels expected to breach 80%.
The finance minister warned in the June supplementary budget that for every rand paid in tax, 21c goes to interest repayments on the government’s growing debt burden. This will be a "fine balancing act", said Bhatia.’
But SA is not alone in this. Many countries are grappling with how to provide stimulus and support to their economies while at the same time "containing" their fiscal trajectories.
Among other issues, the MTBPS will have to outline how the state will shift from recurrent expenditure — possibly the public sector wage bill — towards spending on investment, Bhatia said.
Along with details on how it plans to finance spending, the MTBPS will also have to indicate whether this will be accompanied by any revenue-boosting measures, he said.
"It’s a balancing act that they are going to have to try and pull off to control the debt trajectory."
S&P has SA on a stable outlook after it downgraded its credit rating deeper into junk territory in late April due to the Covid-19 lockdown’s impairment of the country’s fiscal and growth prospects.
It cut SA’s long-term foreign currency rating to BB-, or two notches below investment grade. Fellow ratings agencies Moody’s Investors Service and Fitch Ratings, which also both downgraded SA earlier this year, have the country on a negative outlook.
Though Ramaphosa’s plan includes commitments such as securing energy supply, increased infrastructure spending and expanded employment programmes, it is "slightly thinner" on broader structural reforms, argued Bhatia.
S&P has previously highlighted the dominance of state-owned entities in certain sectors of the economy as well as reforms to address SA’s inflexible labour market.
While the government’s renewed focus on raising growth into 2030 was welcome, more detail would be needed on how this would be financed and "in the absence of wider structural reform, whether it will get the growth rates required".
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