The government could start to stabilise its debt as early as this year and if it can hold the line on spending over the medium term, SA could be looking at a scenario where it is getting rating upgrades instead of downgrades, says Goldman Sachs.
“Fiscal policy has shifted dramatically under the current finance minister and his predecessor,” says Goldman Sachs economist Andrew Matheny, who points out that the government is now focused on reducing the deficit by cutting spending rather than by raising taxes, and on shifting the composition of spending towards public capex (investment spending) and away from current items such as wages.
“If they hold the line on these policies, they are more likely to be successful at consolidating the fiscal position and eventually not just stabilising debt, but bringing it down as a share of GDP. And, potentially, fiscal policy could become more growth supportive,” Matheny said in an interview on Friday.
With exactly a month to go until finance minister Enoch Godongwana presents his medium-term budget on October 26, most economists now expect revenue to again outperform by a wide margin, thanks mainly to the commodities boom. Corporate income tax receipts came in R40bn ahead of the Treasury’s estimates for June, which is one of the two big corporate tax collection months, and estimates are that revenue for the full 2022/2023 fiscal year will come in R50bn-R100bn ahead of February’s budget estimates.
The Treasury has signalled, however, that it does not expect the boom to last beyond the current year and has warned that it is facing a range of spending pressures that SA may not be able to sustain. Goldman Sachs has a diametrically opposed view on the global commodities cycle, particularly when it comes to the precious metals (platinum group metals and gold), which its modelling shows have been the key driver of the outperformance in SA’s corporate income tax receipts.
Matheny pointed out that while dollar prices had fallen in recent months, rand prices had not fallen much at all. “We think this commodity revenue windfall could have some legs and cyclically puts the Treasury in a much more comfortable position,” he said.
‘Sea change’
But Matheny said the more important “sea change” in fiscal policy strategy had been on the spending side, where the government had been successful in reducing the wage bill as a share of GDP considerably over the past two years after steadily increasing it over the previous decade.
The current strategy is in contrast to the long period of underperformance between 2009 and 2019, when the government tried to rein in the deficit by increasing taxes and protecting consumption-related spending, ultimately at the expense of capital spending.
The government has been expecting debt as a share of GDP to stabilise in 2025/2026 at the earliest, but Matheny sees it starting to stabilise or even decline this year. “There’s obviously a risk that they won’t hold the line and that political pressures lead them to derail their strategy, but if … they eventually get public debt down from 70% of GDP to 55%-60%, and if growth picks up meaningfully in the medium term, you could imagine a scenario where SA is actually getting rating upgrades, not rating downgrades.”
Goldman Sachs has historically been more optimistic than many others about SA’s prospects and this has been reflected in its business decisions, with the US-based investment bank gaining a branch banking licence in SA and doubling the size of its Johannesburg office in the past couple of years.
It is still relatively pessimistic on economic growth — with a forecast of 1.1% for 2023 and 1.7% for this year, which is below the Reserve Bank’s revised forecasts last week and the Bloomberg consensus of 1.9% for this year and 1.5% next year.
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