What economists expect of South Africa’s projected deficit
Economists doubt Malusi Gigaba has a plan to avoid a local currency credit rating downgrade by mid-2018
Ahead of Finance Minister Malusi Gigaba’s maiden medium-term budget, most economists are predicting the projected deficit will jump from the 3% range to over 4%, on a revenue shortfall that could be anything from R33bn to R60bn.
The question is what, if anything, he will do by way of tax hikes or spending cuts to get the deficit back on track over the next three years of the medium-term framework.
Some expect the budget will be little more than a holding statement, in which Gigaba will reaffirm the government’s commitment to fiscal consolidation, promising tax hikes and spending cuts to be detailed in the main budget in February.
However, economists are sceptical that he will be willing or politically able to do enough, making a downgrade of SA’s local currency rating likely by June 2018 at the latest.
"It is not clear that the finance minister has a plan," Investec Asset Management’s Nazmeera Moola said. "Without a clear indication of stabilisation in the debt-to-GDP ratio, SA’s rand-denominated bonds would lose their investment grade rating within the next 12 months."
Former finance minister Pravin Gordhan’s February budget projected a deficit of 3.5% in the 2017-18 fiscal year, falling to 3.3% in each of the next two years, which would mean that the public debt ratio would peak at 52% in 2018-19 but start coming down in 2019-20.
That assumed the economy would grow 1.3% in 2017, rising to 2% in 2018 and 2.2% in 2019 – rates that Gigaba will have to revise down significantly. Revenue is undershooting targets as a result of weak growth and a decline in tax compliance. Personal income tax and value-added tax are expected to show the largest gaps.
A big question for markets would be whether there would be additional support to state-owned enterprises that affected the fiscal numbers, Macquarie economist Elna Moolman said.
She expects the deficit will be 0.5 percentage points worse on 2017 and for the next two years, with some underspending countering the revenue shortfall. Though she expects a R40bn revenue undershoot in 2017, this will carry over to 2018 when the shortfall will rise to R60bn. While former minister Pravin Gordhan pencilled in an extra R15bn of tax hikes for 2018-19, Moolman expects Gigaba will have to find R30bn of tax hikes.