Debt to GDP ratio to stabilise below 80% compared with projections in the October 2020 medium-term budget policy statement

The November 2021 Medium Term Budget Policy Statement (MTBPS) aims to stabilise the debt to GDP ratio below 80% compared with projections in the October 2020 MTBPS that saw the ratio rise to 95.3% in 2025/6.

The projections are, however, far worse than the February 2019 Budget projection of stabilising the ratio near 60% as the projection then was a peak of 60.2% of GDP in 2023/24.

Relative to the 2020 MTBPS projection, Treasury expects the deficit to narrow at a slightly faster pace, while improved cash balances reduce the borrowing requirement and debt issuance over the medium term. Debt is now projected to stabilise at 78.1% of GDP in 2025/26.

The Treasury reiterated its message that without measures to reduce government expenditure, a continued increase in debt and debt-service costs will crowd out economic and social expenditure.

If economic growth does not strengthen in the period ahead, more difficult fiscal adjustments will be required to return the public finances to a sustainable path.

There are three main risks to reducing the fiscal deficit in the years ahead.

The first was a widening budget deficit due to lower economic growth as a result of renewed waves of the Covid-19 pandemic, which would most probably increase the cost of funding alongside the stock of debt.

The second risk factor related to inflation and exchange-rate risks is unanticipated increases in inflation or a depreciation in the rand exchange rate would increase the cost of outstanding inflation-linked or foreign-currency debt. This risk is in particular related to the redemption of foreign loans, which total R41.6 billion in 2023/24 and R35.5 billion in 2024/25.

The third risk is related to South Africa’s sovereign credit ratings, which have been downgraded to junk status since April 2017. Further downgrades deeper into the sub-investment junk territory would result in a higher budget deficit, rising debt levels and weak economic growth. The credit rating agencies are due to issue their view on the MTBPS and government’s ability to achieve fiscal consolidation around 19 November.

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