Newly appointed finance minister Enoch Godongwana looks set to present a markedly rosier medium-term budget policy statement in early November, data from the SA Reserve Bank confirmed on Tuesday.
According to the Bank’s latest quarterly bulletin, the recent overhaul of SA’s GDP numbers, which showed that the economy was 11% larger than previously thought, will reduce closely watched economic aggregates such as the fiscal deficit and debt-to-GDP ratios by about a tenth. This may help SA stave off any further negative ratings actions, according to a leading economist.
The quarterly bulletin also underscores the improvement in government revenues — up by 60.8% year on year in the first quarter of the 2021/2022 fiscal year — as tax collections improved, particularly due to corporate income tax, partly driven by the mining sector buoyed by commodities prices.
The tax overrun is expected to give the government much-needed breathing room after its already weak finances were pushed to the brink by the onset of the Covid-19 pandemic and several harsh lockdowns that precipitated a succession of ratings downgrades by the three main ratings agencies Moody’s Investors Services, S&P Global and Fitch Ratings during 2020.
Godongwana’s maiden budget will be closely watched for continued commitment to fiscal consolidation efforts, in the face of growing pressure to up spending off the back of buoyant revenues and better economic growth.
“As a larger economy is better able to service the same level of debt, this is a positive outcome for SA from a credit rating perspective,” said Investec chief economist Annabel Bishop in a note.
Bishop does not expect Fitch and S&P to downgrade SA’s credit ratings in November from the current BB, with faster growth for 2021 also likely now compared with the agencies’ previous expectations.
The outcome of the medium-term budget policy statement will remain the most crucial set of information that the agencies’ will base their decisions on, she said.
“However, revenues are looking positive and increased efficiencies at Sars [SA Revenue Service] in particular are likely to deliver a better outcome than previously anticipated,” she said.
According to the Bank, the government achieved a primary budget surplus of R9.8bn, or 0.6% of GDP, in the first three months of 2021/2022 compared with a deficit of R96.7bn, or 8% of GDP, recorded in the first quarter of 2020/2021.
The national government’s gross loan debt as a ratio of GDP was 68.8% as at June 30, according to the Bank. Though this was “markedly higher compared with 62.6% a year earlier”, it had “encouragingly, remained below the originally budgeted target of 81.9% for fiscal 2021/2022 as a whole”.
Already one credit ratings agency, Fitch, has noted that SA’s robust economic recovery and better-than-forecast tax collection have boosted SA’s chances of achieving its fiscal consolidation aims.
In a statement last week it said the government’s debt-to-GDP ratio — a key metric watched by ratings agencies to assess a country’s financial health — will decline to 79.3% for the 2020/2021 fiscal year from the previous estimate of 82.5%, while the budget deficit is likely to be “significantly smaller” than the 9.3% projected in the February budget.
But Fitch also warned that SA “will continue to face substantial challenges as it seeks to stabilise debt”, including pressure to increase social spending in the form of a basic income grant, a debate that gained momentum after the looting and riots in July, and the funding requirements of struggling state-owned enterprises such as Eskom.
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