Moody’s: SA’s slightly lower deficits won’t prevent debt rising

Moody’s today issued a report on South Africa, following Finance Minister Tito Mboweni’s Budget Speech, and the publication of the Budget Review earlier this week.

In the Budget Review, Treasury slightly lowered its deficit forecasts in response to higher revenue than expected in October and a milder 2020 GDP contraction.

“However,”Moody’s says, “these adjustments are modest and will not
prevent government debt burden rising over the next three years. Moreover, uncertainty over the pace of the economic recovery and the capacity of the government to limit spending (especially interest payments and support to state-owned enterprises) remains elevated.”

For the financial year ending 31 March 2021 (FY2020), the Treasury now expects to record a consolidated budget deficit of 14.0% of GDP, compared to its October forecast of 15.7%.

“A less severe fall in revenue of 11% than the 16% forecast in October is the main driver, although this still implies a year-on-year revenue loss of about 2 percentage points of GDP.

“The unexpected rebound in value-added tax (VAT) receipts since the fourth quarter of 2020 and higher-than-anticipated corporate tax receipts (primarily from the mining sector) were largely responsible for this revenue outperformance. Spending is broadly in line with October forecasts in nominal terms.”

The lower than expected deficit in FY2020 led to revisions in the government’s deficit forecasts for FY 2021-23. “However, the pace of reduction in deficits is slower given the government’s decision to withdraw some tax-raising measures and a milder recovery in revenue,”Moody’s says.

The rating agency adds that although it has also revised down its deficit forecasts following the release of FY 2020 estimates, it continues to expect a slower pace of fiscal consolidation and wider deficits than the government based on the expectations of higher primary spending (especially wages) and interest spending.

“The revisions slow the pace of debt accumulation compared to our previous projections, but we still expect the government’s debt burden will rise to reach 100% of GDP by FY 2024.

“Moreover, risks remain elevated that the government’s debt burden and affordability deteriorate significantly more rapidly than our baseline.

“First, as acknowledged by the Budget Review itself, pandemic developments remain highly uncertain, including the spread of new variants and the pace of vaccination. Second, the government risks overspending. Although support to state-owned enterprises (SOEs) increased only marginally in the budget, the sector and especially Eskom Holdings continue to pose significant contingent-liability risks to the government. Risks to our baseline scenario from higher wages are more contained because we already pencil in stronger growth in that spending than the budget and a December court decision allows the government to limit increases in the wage bill to 2% this fiscal year (that is, below the rate set under the three-year agreement running for fiscal years 2018-2020).”