Fitch: South African Budget Shows Persistent Fiscal Challenges

The South African budget statement highlights the challenge the government faces in narrowing the fiscal deficit, curtailing interest expenditure and containing debt, without denting the country's already subpar economic growth, Fitch Ratings says.

Minister of Finance, Nhlanhla Musa Nene's first budget provided details of the fiscal consolidation package announced in last October's medium-term budget policy statement (MTBPS). Measures to increase revenue include a 1pp increase in income tax for those earning more than R181,000 (USD15,900) as well as a sharp increase in the fuel levy. However, measures totalling a net R8.2bn for the current fiscal year appear to fall well short of the treasury's announcement in October to raise revenue by R27bn over the next two years. Details of the Davis Tax Commission, whose findings were expected to have been included in the 2015 budget, will only be released later this year, suggesting more tax increases may come in next year's budget.

Non-interest expenditure will be cut by R25bn in FY16 and FY17 as outlined in the MTBPS, keeping real spending growth to an average of 2%. There will be a focus on containing goods and services spending by reducing waste and improving efficiency - a mantra for much of the past decade. Public sector wage growth of 6.6% has been budgeted, so a key risk to public finances is that wage negotiations underway settle above this figure. Details of the government's R24bn assistance package for state-owned electricity company Eskom and its financing were not forthcoming.

Despite efforts to raise revenue and cut non-interest expenditure, the deficit forecast for FY16 has been revised up, to 3.9% of GDP (from 3.6% in October). The National Treasury now expects a deficit of 3.9% of GDP for FY2015, down slightly from 4.1% at the MTBPS, but this is largely due to upward revisions to GDP already announced last year.

Gross national (central) government debt as a percentage of GDP has been revised lower following GDP revisions, while the pace of increase appears to have moderated. The ratio is expected to increase from 46.2% in FY15, to 47.6% in FY18, suggesting that the debt ratio may be close to peaking, although this is not certain given the long-standing challenges to consolidation and growth.

Fitch has previously highlighted weak growth and a failure to boost potential growth, which has fallen in recent years, as a negative rating trigger. The National Treasury again revised down its forecast for GDP growth to 2% for 2015 (from 2.5% in the MTBPS) and to 2.4% in 2016 (from 2.8%). Downward revisions to growth forecasts have become regular in recent years, reflecting among other factors, electricity shortages and divisions in the labour market.

Efforts at implementing the National Development Plan remain piecemeal, raising concerns about its effectiveness in boosting growth to the eventual target of5%.
The outlook for the public finances will form an important part of Fitch's next scheduled review of South Africa's sovereign ratings on 5 June. Our Negative Outlook and 'BBB' rating for South Africa recognise the growth and fiscal consolidation challenges, while acknowledging the economy's credit strengths and shock absorbing capacity through a floating exchange rate, strong banking system and financing flexibility afforded by a high share of local-currency debt with long maturity.