Fitch Ratings believes the revised revenue projections and the deficit for fiscal year 2024/25 are “optimistic”, and says the National Treasury is likely to have to allocate more resources for state-owned companies (SOEs).
In its response to the 2024 national budget presented by finance minister Enoch Godongwana last Wednesday, the US-based credit ratings firm on Monday said the SA government had not factored additional support it will have to give to SOEs into its debt forecasts, which is why the latest fiscal projections show smaller budget deficits than previously forecast.
“The government is not budgeting for additional support to Transnet, a state-owned logistics firm, beyond the R47bn guarantee granted in December 2023,” the agency said. “But we estimate that further fiscal support may be required in the coming fiscal years to address the company’s entrenched operational and financial problems and to contribute to its turnaround strategy.”
Fitch said in its previous review in January it assumed that Transnet support would take the form of a debt transfer to the sovereign of R50bn, split between the next two years — 2024/25 and 2025/26.
Godongwana’s budget has received mixed reviews. Some have described it as a welcome surprise, with a better-than-expected outcome and a continued policy of fiscal consolidation. Others called it an electioneering con designed to boost the governing party’s campaign through expanded social support and no new tax measures.
Revenue driven
The budget projects the consolidated deficit will reach 4.9% of GDP for fiscal year 2023, 4.5% in fiscal year 2024 and 3.7% in fiscal year 2025. That compares with forecasts of 4.9%, 4.6% and 4.2% respectively, in the medium-term budget policy statement in November 2023.
Consequently, the Treasury now expects gross debt-to-GDP to rise to 75.3% in fiscal 2025, lower than the previous forecast of 77.7%. The changes are mainly revenue driven, with revenue-to-GDP at 27.5% in fiscal 2025, compared with 27.1% in the medium-term budget policy statement.
The decline in the fiscal deficit was also fostered by incorporating the distribution of R150bn from the Reserve Bank’s gold and foreign exchange contingency reserve account (GFECRA), over the medium-term expenditure framework period (up to R100bn in fiscal year 2024, and R25bn in fiscal years 2025 and 2026).
The GFECRA captures valuation gains or losses on the country’s foreign-currency reserve transactions, which amounted to a positive R507.3bn in January 2024.
“We believe that the revised projections for revenue and the deficit for fiscal year 2024 and fiscal year 2025 are optimistic,” Fitch said. “Our own fiscal projections remain more conservative than the government’s, even considering transfers from an account held with the SA Reserve Bank.”
In January the company affirmed SA’s rating at BB- with a stable outlook — that’s three notches below investment grade, and one notch below Moody’s Investors Service — and projected that the fiscal deficit would reach 4.8% of GDP in fiscal 2024 and 4.6% in fiscal 2025.
While acknowledging the drawdown from some of the valuation gains in the GFECRA would reduce debt accumulation by about two percentage points of GDP by the end of fiscal year 2026, Fitch said it would have a limited effect on the sovereign’s credit profile.
“Although gross debt will be lower than it would otherwise have been, all else equal, the move does not address underlying issues driving the government’s debt accumulation or the sovereign’s other main rating drivers,” it said.
“These include SA’s low economic growth potential, persistent and large fiscal deficits, elevated public debt and exceptionally high levels of poverty and inequality.”
Fitch said in its previous review that the gross debt-to-GDP ratio was expected to reach 83.2% in fiscal year 2025 and added that the GFECRA drawdown would lower this by about two percentage points.
Still, the agency said it considered the Treasury’s projections of non-interest expenditure forecasts, including the wage bill and social grants, to be realistic. It also acknowledged that the Treasury is still conducting consultations on a proposed new fiscal rule.
But the budget indicated that a debt-stabilising primary surplus would anchor fiscal policy in the medium term, it said.
Fitch said the introduction of new fiscal rules could help to promote fiscal sustainability in the longer term, but their influence on the sovereign credit profile would depend on how binding the constraints were and the depth of political support.
Old Mutual Group chief economist Johann Els said he regarded the budget as market friendly, with better fiscal outcomes in the current fiscal year compared with the medium-tern budget.
The Treasury delivered on continued fiscal consolidation and also gave credible economic, revenue and expenditure assumptions, he said.
“Markets will like the continued strong emphasis on fiscal consolidation, the primary surplus and a conservative stance in an election year,” Els said.
Nedbank senior economist Isaac Matshego said it was unlikely Transnet would achieve an operational and financial turnaround without further assistance from the fiscus.
“Therefore, it is likely that more financial support will be set aside for the utility during 2024/25, which would push the borrowing requirement higher,” Matshego said.
Update: February 27 2024
This article contains additional comments from economists.
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