Finance minister Enoch Godongwana’s medium-term budget policy statement on Thursday — which emphasised fiscal restraint despite building spending risks — was met with cautious optimism and may have an outside chance of stabilising SA’s credit ratings outlooks, according to economists.
Godongwana’s budget painted an improved fiscal picture as a better-than-expected growth recovery, a commodities surge that temporarily boosted revenues and the revision of GDP numbers all conspired to reduce the harrowing budget deficits and debt levels expected at the same time last year.
Though spending risks, in the form of expanded social protection and further public sector wage increases, may yet materialise come February’s budget, Godongwana promised an “unflinching commitment” to fiscal sustainability and the hastening of economic reforms.
His adherence to consolidation efforts and the “absolute need for stronger growth” was distinctly positive and a message that the markets would welcome, Old Mutual Investment Group economist Johann Els said.
But Els flagged the spending risks that lie ahead, notably a decision regarding the future of added social welfare support after the R350 relief of distress grant expires in February, as well as the direction of the public sector wage bill.
These pressures notwithstanding, Godongwana’s medium-term budget policy statement was “such a breath of fresh air” compared with the much gloomier picture presented this time last year, he said.
The Treasury is now forecasting growth for 2021 to come in at 5.1%, well up from the February budget’s estimate of 3.3%, though growth moderates to more muted levels of 1.8% in 2022 and 1.6% in 2023.
The government’s consolidated deficit is expected to reach 7.8% of GDP in 2021/2022, down from February’s forecast of 9.3%, and it is expected to decline to 4.9% of GDP by 2024/2025.
Though debt levels remain high and debt repayments continue to crowd out spending on social services, the current estimates are an improvement on previous numbers.
Gross loan debt to GDP is expected to reach 69.9%, in 2021/2022 and rise to 78.1% in 2025/2026, well down from February’s forecast of 81.9% in 2021/2022 and a peak in 2025/2026 of 88.9%.
These numbers are closely watched by the three main ratings agencies: Moody’s Investors Service, Fitch Ratings and S&P Global. All three rate SA sovereign debt as subinvestment grade. Moody’s and Fitch have SA’s rating on a negative outlook.
The revisions to these important metrics may have been disappointing compared with analysts’ forecasts ahead of the medium-term budget policy statement, but the underlying assumptions made by Treasury were very conservative, said Carmen Nel, economist and macro strategist at Matrix Fund Managers.
This conservatism, notably around forecasts for GDP growth, was, however, “the right thing to do” as the Treasury was trying to make it clear that the recent terms of trade boost SA has enjoyed “is not necessarily going to be sustained”, she said.
“From a short-term perspective [the improved metrics] should limit the risk of a downgrade from Moody’s or Fitch,” said Nel.
But, much like investors and the private sector, the ratings agencies will want to see “clearer concrete action on reforms”, she said. “For now I think it’s neutral for the ratings agencies, with a small chance that maybe the negative outlook can shift to stable.”
Els said ratings agencies are likely to wait until February’s budget to see how expenditure risks materialise before taking any action.
But given the improvement in forecasts, come February, Moody’s and Fitch could potentially change their outlooks from negative to stable, he said.
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