Ratings agency Fitch has expressed scepticism about the Treasury’s ability to deliver on last week’s medium-term budget policy estimates, saying the government will probably have to spend more on public sector pay and on bailing out Transnet than it has budgeted for and debt will end up higher.
But the ratings agency conceded that if the Treasury could achieve its targets, that would be positive for SA’s credit ratings, as would an uplift in economic growth over the medium term.
Though the Treasury lowered its medium-term growth forecasts in last week’s budget statement, Fitch has still lower numbers. Its scepticism on growth was echoed on Tuesday by the parliamentary budget office and by the Financial and Fiscal Commission, which told parliament the economy was unlikely to reach the 1.8% average growth projected by the Treasury for the next three calendar years, with 1.5% a more likely outcome.
“Fitch Ratings views the government debt/GDP projections contained in SA’s medium-term budget policy statement (MTBPS) as optimistic, but it could be positive for the sovereign’s rating if debt does follow the path projected by the government,” Fitch said.
“If we become more confident that SA’s medium-term growth outlook will improve sufficiently to reduce challenges associated with fiscal consolidation, this could also be positive for the rating,” it said.
Fitch is the first of the ratings agencies to publish a formal response to the MTBPS numbers, which came in slightly worse than the Treasury had estimated in February (with a revenue shortfall of R22bn) but stayed on course to stabilise the public debt ratio by fiscal 2025/2026. Rival S&P is scheduled to issue a report next week.
Fitch expects the government will have to implement debt relief for Transnet worth about 0.3% of GDP in each of the 2024 and 2025 fiscal years, which will increase the debt ratio.
It expects higher than expected public-sector wage settlements and transfers to state-owned enterprises to add to the deficit over the medium term, which Fitch projects at 4% for fiscal 2026, against the Treasury’s 3.6%. Though the Treasury lowered its economic growth projections compared to the February budget, Fitch has even lower projections.
But Fitch is more optimistic about revenue than the Treasury, which reduced its estimates last week, particularly for the fuel levy and import VAT on lower diesel consumption by generators. Fitch said there was potential for higher revenue collection given the strong performance so far this year, with revenue up 19% in the first five months of the fiscal year.
Fitch said last week’s MTBPS revenue and spending projections were close to its own forecasts in September, when the ratings agency affirmed SA’s rating at double B minus with a stable outlook, saying that a durable stabilisation in the debt- to-GDP ratio could, individually or with other factors, lead to positive rating action.
It still expects the debt-to-GDP ratio would reach 78% in fiscal 2026, from 76% in fiscal 2024 — more conservative than the Treasury’s latest forecast that the debt ratio would peak at 75.5% in 2025/2026.
Subdued outlook
The Financial and Fiscal Commission, a constitutional entity that advises the government on financial and fiscal matters, told parliament’s four appropriations and finance committees that growth would climb to 1.7% in 2027/28 — lower than the Treasury’s 1.9% forecast for 2027. It warned that the subdued outlook underscored the urgent need to restructure the economy by addressing unemployment and reallocating public spending towards growth-promoting infrastructure development.
“The economic and fiscal outlook for SA is dependent on substantial reforms and strategic realignments across all government sectors to invest effectively on infrastructure development to positively impact economic performance,” Financial and Fiscal Commission head of research Chen-Wei Tseng said in his presentation. “SA’s growth problem is caused by inefficiencies in its structural factors and over a decade of lack of capital investment.”
The commission said SA’s fiscal position was “unsustainable” and government expenditure needed to be reduced.
Tseng said the Treasury’s projected fiscal consolidation over the medium term appeared to be insufficient as the main budgeted expenditure was expected to consistently exceed revenue and revenue growth is projected to decline. This added to concerns over the sustainability of the fiscal framework.
Tseng noted that maturing debt was nearly R90bn in 2024/25, increasing substantially to almost R400bn within five years, rising from about 5% of total revenue in 2024/25 to a peak of 22.1%.
“Though redemptions are subject to renegotiation, the current trend in the redemption schedules underscores the long-term fragility of the fiscal framework,” the Financial and Fiscal Commission said.
It also urged a reduction in public sector compensation costs and supported the government’s R11bn early retirement plan for public servants over the age of 55.
The commission proposed two scenarios to restore fiscal sustainability within the government’s expenditure framework: a medium-term five-year path of fiscal consolidation and a short-term three-year path. The three-year plan envisaged a cap on expenditure growth at 1% a year over the period to achieve a zero-balance budget between total revenue and expenditure, thereby within three years.
The parliamentary budget office also doubts the Treasury’s growth projections. Its deputy director for economics, Seeraj Mohamed, said they assumed a level of household consumption expenditure which was unrealistic because of the indebtedness of households and the associated debt service costs. Household debt to disposable income was 62.4% in 2023 and has been above 60% since 2006.
“Based on previous experiences, the MTBPS 2024 forecast of growth that relies on increased household consumption and investment over the medium-term expenditure framework seems unrealistic to achieve,” Mohamed said.
“Since government spending will be relatively constant, much of the forecast growth over the medium-term expenditure framework is expected from households and investment.” he said.
Mohamed has consistently opposed the Treasury’s policy of fiscal consolidation, arguing that more social spending and support for industrial development was required for growth.
While the MTBPS forecast average annual growth for gross fixed capital formation of 4.2%, the average for the 10-year period before the pandemic (2010-19) was only 0.3%.
Update: November 5 2024
This story has been updated with additional information.
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