Some planned fiscal consolidation evident – Annabel Bishop
|Published
By Annabel Bishop
2022’s Medium-Term Budget Policy Statement (MTBPS) has seen the expected improvement in government’s debt to gross domestic product (GDP) and fiscal deficit projections.
Over the medium term, gross debt is projected to now peak at 71.4% of GDP in 2022/23, more quickly now than the previous peak estimated at 75.1% of GDP in 2024/25.
The declining ratios are due to some drop in borrowings, but key is the upwards revisions to its GDP forecast by National Treasury in order to account for higher inflation, with both the gross loan debt and deficit ratios lower as a percent of GDP.
The 2022/23 budget deficit is now projected at -4.9% of GDP versus the -6.0% of GDP estimated for this fiscal year in February.
The following three medium-term years, of 2023/24 to 2025/26, see the budget deficit projected at -4.1% of GDP, -3.9% of GDP and -3.2% of GDP versus the February 2022 Budget estimates of -4.8% of GDP and -4.2% of GDP. A significant degree of planned fiscal consolidation is evident.
That is, the medium-term budget deficit estimate drops to close to -3.0% of GDP, the ratio at which the budget deficit is seen as contributing to sustainable government finances, although for debt the ratio is 60% of GDP, with South Africa’s budget estimate not including that in the medium term.
With gross loan debt dropping over the 2023/24 to 2025/26 Medium-Term Framework period, to 70.8% of GDP, then 70.4% of GDP and then 70.0% of GDP, this is also in line with our expectations of close to 70% of GDP, and we continue to believe the government remains wary of absorbing the debt of Eskom (and other state-owned enterprises) it has guarantees over.
The budget is credit-neutral to positive, and no immediate credit rating upgrades are likely as the agencies wait for the details on National Treasury’s plans for Eskom’s debt.
A rise in South Africa’s debt ratios due to absorbing Eskom’s debt is unlikely to be a concern for the credit rating agencies, which have been calculating Eskom’s debt as part of the government’s responsibilities due to the fact that the state mainly guarantees the repayment of Eskom’s debt.
Little detail was given on absorbing Eskom’s debt onto the state balance sheet, other than it will be of the magnitude of one to two-thirds of the R400 billion and that National Treasury “is leading a process to finalise a debt relief programme designed to restore Eskom to efficiency and financial sustainability”.
The specifics of the programme, including the selection of the relevant debt instruments and the method of effecting the relief, are still being finalised. With the government taking over part of Eskom’s debt, this would allow the SOE to enter the markets again to increase its issuance.
The rand has strengthened to R17.96 against the dollar this afternoon from R18.15 this morning, but was at R15.19 after the February Budget this year, with a severe risk-averse environment in global financial markets weakening the rand in the interim.
South Africa’s credit risk has subsided somewhat. The sheer quantum of debt still climbs, however, with 2025/26’s R5.6 trillion double 2018/19’s R2.8trl. The focus remains firmly on fiscal consolidation, with 2023/24 expected to see a primary budget surplus (where revenue exceeds non-interest spending) of 0.7% of GDP.
Economic reforms to drive growth remain in focus, too, particularly the need to raise electricity supply to the level demanded by a fast-growing economy.
The surprise in the budget was the planned reduction in borrowings, and this should be positive for yields, although the global risk of environment, high inflation and rising interest rates dulls the potential for a very sharp improvement.
Annabel Bishop is the chief economist at Investec.
BUSINESS REPORT