Feb 28 - The upward revision to the estimate for the 2012/13 budget deficit
to 5.2% of GDP underscores the pressures on the South African budget and the
risks to medium-term deficit-reduction targets, whose arithmetic depends on a
recovery in economic growth and tight expenditure control, Fitch Ratings says.
Nevertheless, South Africa has reaffirmed its commitment to bring down the
deficit to 3.1% and stabilise the net public debt/GDP ratio in 2015/16. Thus,
overall, the new fiscal targets are not significantly different from those in
last October's Medium Term Budget Policy Statement (MTBPS). The targets are
broadly in line with our projections, which are consistent with South Africa's
'BBB' rating with a Stable Outlook.
If GDP growth underperforms expectations, difficult decisions will be needed
after the 2014 presidential elections to keep the fiscal plans on track,
stabilise the debt/GDP ratio, and forestall downward pressure on the rating. We
had not anticipated a tightening of fiscal policy through additional
consolidation measures in this year's budget, in light of the weak growth
backdrop and upcoming elections.
The 5.2% budget deficit estimate is up from 4.8% in the MTBPS (and 4.9% in
Fitch's forecasts when it downgraded South Africa in January), as weaker GDP
growth and the impact from the mining strikes cut revenue by 0.4% of GDP.
Nevertheless, fiscal targets were little changed at 4.6% in 2013/14 (from 4.5%)
and 3.9% in 2014/15 (from 3.7%), and the target of 3.1% was retained for
The rise in budget deficit targets reflects a downward revision to the National
Treasury's GDP growth forecasts to 2.7% in 2013 (from 3.0% in the MTBPS), 3.5%
in 2014 (from 3.8%) and 3.8% in 2015 (from 4.1%). The 2013 and 2014 growth
forecasts are exactly in line with our own. The South African government has
kept nominal expenditure within its prior 2012/13 ceiling, and has raised this
only fractionally in subsequent years - supporting confidence in fiscal
management and the rating Outlook.
Finance Minister Pravin Gordhan stated that net government debt should now
stabilise marginally higher than 40% of GDP in 2015/16, only a little above the
estimate of 39.2% in the MTBPS. However, this is premised not only on the
recovery gathering strength but also on containing real expenditure growth to an
average of 2.3% a year over the next three years (compared with 2.9% in the
MTBPS) - and half the average of around 4.6% in the past two years. We see this
as challenging in view of social pressures to raise living standards.
The National Development Plan was prominent in the budget speech (as in the
president's recent State of the Nation Address and following its endorsement at
the ANC conference in December), offering hope of a greater focus on structural
reforms. Nevertheless, the proof of reforms will be in their implementation. The
budget also emphasised employment growth, and resurrected proposals for a youth
wage-subsidy scheme. Adoption of the wage-subsidy scheme would be an important
indication of a greater political appetite to push through structural reforms.
As previously trailed, a tax policy review will be initiated this year to
consider potential changes in taxes, which could play a role in helping to close
the budget gap in future years.
The National Treasury's latest macroeconomic projections contained a notable
upward revision in the forecast of the current account deficit to over 6% of GDP
in every year between 2012 and 2015, compared with 5.5% in MTBPS and our
forecasts of 5.6% in 2013 and 5.3% in 2014.
The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
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