Moody’s on South Africa: fiscal slippage likely this year, but medium-term targets within reach

“We expect a slower pace of fiscal consolidation than the Government of South Africa (Baa3 stable) is forecasting based on a number of headwinds,” Moody’s said in a statement this afternoon.

“That said, its medium-term deficit targets remain within reach and if met, will support a stabilization of debt levels and reinforce our assessment of the sovereign’s fiscal and institutional strengths,” Moody’s added.

Slow growth and wage bill are main fiscal headwinds this year.

“We forecast slower growth than the government this year, which will weigh on tax revenue intake. The public sector wage agreement in June also brings extra, unbudgeted costs. As a result, we expect a fiscal deficit of around 4.0% of GDP in 2018-19,1 implying a 0.4 percentage point of GDP shortfall from government targets. The main risks to our budget deficit expectations include rising interest costs in the context of increasing emerging market risk aversion and potential support to state-owned-enterprises (SOEs).”

The government still has some flexibility to make adjustments in an effort to achieve fiscal targets.

“We expect near-term fiscal adjustments will be made on the spending side based on the government’s track record of operating within spending ceilings and undershooting revenue targets. However, improved tax collection led by efforts by the South African Revenue Service will allow revenue to take more prominence in the longer term. Details on the fiscal adjustments will be published in October as part of the government’s medium-term budget policy statement (MTBPS).”

Long-term fiscal outlook has weakened only marginally.

“Our baseline scenario anticipates that the government will hit its 3.5% fiscal deficit target by 2020-21 and that debt will stabilize at around 56% of GDP. There are downside risks from unbudgeted spending like support to SOEs, but they are unlikely to materially alter our debt projections.”

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