Finance minister Tito Mboweni delivered a shocking medium-term budget policy statement (MTBPS), with the budget deficit set to be two percentage points higher on average over the next three years than forecast just eight months ago.
While ratings agencies and financial markets may welcome realistic revisions for growth and debt, they may be left disappointed by the lack of details on action to reverse the trend, even as Mboweni said "the consequence of not acting now would be gravely negative for SA".
Many of the hard decisions on spending and potential tax changes have been deferred to the main budget, which is normally unveiled in February.
"Mboweni frankly and realistically confirmed that unless progress is made in reducing the cost drivers of government as well as state-owned enterprises like Eskom, SA is in danger of falling into a debt trap," said Raymond Parsons, an economist at North West University Business School.
LISTEN | 2019 Medium-term budget policy statement highlights
The government pencilled in just R21bn of spending cuts for 2020/2021, less than the R56bn allocated to Eskom for that year. There were no concrete plans for the restructuring of the utility’s R450bn debt, while the Treasury said Eskom could receive further funding above the R230bn of support set aside for the next decade, provided it meets certain conditions.
"We cannot continue to throw money at Eskom," Mboweni said in his speech, which was released before his address to parliament. "For the sizeable support required, it cannot be business as usual," he said, demanding that the utility improve cash management and the running of its current plant and equipment, and fast-track the break-up of the company into three units.
In a sign that the Treasury has yet to win political support across the government for measures that it says are needed to get state finances on a more sustainable path — including R150bn in spending cuts and revenue raising over three years — it emphasised the dire state of government finances and the need to act urgently, partly in the hope that the grim forecasts will act as a wake-up call for other departments.
Moody’s Investors Service, which is due to give a scheduled update on SA’s rating on Friday, may see this as another sign of the government kicking difficult decisions down the road. No ratings cut is expected, though the agency may change the outlook from stable to negative.
Moody’s is the only major rating company with an investment grade on SA’s debt, a loss of which may lead to billions of rand exiting the country’s bonds and weaken the rand.
Growth forecasts
The Treasury downgraded its 2019 growth forecast to 0.5% from 1.5%, even lower than the SA Reserve Bank’s 0.6% prediction, with the government expecting only a "gradual recovery in confidence and investment" in coming years.
The economy will then expand 1.2%, 1.6% and 1.7% in the three years through to 2022, well below the levels that economists say are needed to deal with an unemployment
rate close to 30%.
With revenue collection by the SA Revenue Service (Sars) set to be R53bn less than the figure in February, bringing under-collection since 2018/ 2019 to R110bn, the budget deficit will balloon to 5.9% in the current fiscal year, averaging 6.2% over the next three years compared with the 4.2% forecast
in February.
"In the decade since the global financial crisis, government has run large budget deficits, raising its borrowing and making the increase in SA’s debt-to-GDP ratio among the highest of peer countries.
"This approach cannot be sustained," the medium-term budget policy statement said.
Debt as a percentage of GDP, which the government had previously predicted would peak at just more than 60% in 2023/2024, is now expected to climb to 71.3% a year earlier.
Depending on the amount of financial support needed by Eskom, the ratio could climb to almost 80.9% in 2027/2028, up from less than 50% four years ago.
"There is no status quo option. The consequence of not acting now would be gravely negative for SA.
"Over time, the country would likely face mounting debt service costs and higher interest rates and may enter a debt trap," Mboweni said.
Debt service costs, the fastest area of spending, will amount to R204bn in 2019.
"On our current trajectory by the end of the three-year framework, debt service costs will be bigger than spending on health and economic development," which is not sustainable, he said.
Commercial banks
The state conceded that it is unlikely to convince commercial banks to reschedule SAA’s government-guaranteed debt of R9.2bn and that it will most likely have to step in and repay the debt in line with its contractual requirements.
The medium-term budget policy statement’s "downward revision on economic growth and upward revision in planned state lending will certainly push Moody’s debt metrics beyond critical levels, leading to a downgrade to noninvestment grade if the agency wants to maintain its integrity", economists at PwC said in a note on Wednesday
While Mboweni’s statement was notable for its lack of specific measures, it flagged possible tax increases and reining in the growth in public sector wages as possible ways of addressing the deterioration in public finances. That and the crisis at Eskom threaten to divert spending away from existing levels of service provision and infrastructure investment.
Mboweni said discussions would have to take place with labour about the public sector wage bill between now and the February budget. Options to be considered include pegging cost-of-living adjustments at or below CPI inflation, halting automatic pay progression and reviewing occupation-specific dispensations for wages.
Mboweni also announced a salary freeze for cabinet ministers, premiers and MECs at current levels, with the likelihood of an adjustment downwards. Caps will be placed on perks.
The Treasury has set a target of achieving a main budget primary balance by 2022/2023, excluding support to Eskom. A main budget primary balance is when revenue equals non-interest expenditure. Real main budget non-interest spending grows at 1.2% in 2020/2021 and 0.1% in 2021/2022.
To bolster the fight against corruption, the National Prosecuting Authority will get an additional R1.3bn over the next two years and Sars an additional R1bn.
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