South Africa's finances are dire and set to worsen in coming years, Finance Minister Tito Mboweni said.
Weak economic growth and the deteriorating fiscal position have affected the government's borrowing strategy and dented tax collections, Mboweni and the National Treasury said in the medium-term budget policy statement released Wednesday.
While the state is reducing spending by a total of 50 billion rand ($3.4 billion) by 2022 to plug the widening budget gap, it needs to find another 150 billion rand of savings to achieve a target of a primary balance by 2023. The nation is also scrutinizing the public-sector wage bill, state-owned companies, executive remuneration and benefits, and fiscal leakages, it said.
The following charts illustrate just how much the situation has worsened from the outlook in February, when Mboweni presented his first budget:
The fiscal deficit will peak at an 11-year high of 6.5% of gross domestic product next year. That's 2.2 percentage points higher than the February estimate.
Rolling blackouts caused economic output to contract the most in a decade in the first quarter, and prompted the Treasury to slash its growth forecast for this year to 0.5%. Since the start of the year, the International Monetary Fund, the Reserve Bank and the World Bank have all cut projections for 2019 as poor investor sentiment due to policy uncertainty weighs on output.
Bailouts for state-owned companies such as the power utility, airline, public broadcaster and arms maker may see gross government debt surging to 80.9% of GDP in the 2028 fiscal year unless urgent action is taken. The trajectory is almost 20 percentage points higher than forecast in the February budget and shows no sign of stabilizing.
“Once the debt level breaches the 60% level, we should be concerned,” Mboweni told reporters. “Ideally, your debt to GDP should be around 30% or lower.” The “most desirable sweet spot” of about 64% would require 250 billion rand of spending cuts by 2022, he said.
Read more on how bailouts may push the debt ratio above 70% of GDP
The higher debt numbers and weak expansion raise the risk the country will lose the stable outlook on its last investment-grade rating with Moody's Investors Service, which is scheduled to publish an assessment on Friday. A switch to a negative outlook could be the precursor to a downgrade that would increase borrowing costs and trigger massive investment outflows. Treasury officials are set to talk with Moody's and Fitch Ratings later Wednesday.
Ratings outcomes are a result of the state's policy choices and whether the country is able and willing to repay debt, central bank Governor Lesetja Kganyago told reporters. “We should not be sitting here and waiting for Father Christmas with the rating,” he said.
Read more:
South Africa to Bail Out Indebted Airline
Eskom Woes Have No End in Sight
South Africans Face Tax Increases
--With assistance from Zoe Schneeweiss and Mike Cohen.
To contact the reporters on this story: Ana Monteiro in Johannesburg at amonteiro4@bloomberg.net;Prinesha Naidoo in Johannesburg at pnaidoo7@bloomberg.net
To contact the editors responsible for this story: Rene Vollgraaff at rvollgraaff@bloomberg.net, John Viljoen
©2019 Bloomberg L.P.
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