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South Africa MTBPS Review Summary

Core Content

The document provides an analysis of South Africa's Medium Term Budget Policy Statement (MTBPS) presented by Finance Minister Pravin Gordhan, focusing on fiscal policy, economic outlook, and the implications for the country's credit rating. It highlights both the efforts made to stabilize the budget and the ongoing challenges that threaten the nation's financial stability.

Main Budget Overview

• Budget Deficit: The budget deficit is expected to narrow from a 3.6% of GDP in FY2016-17 to a 3.8% of GDP in FY2016-17 (due to revised estimates), and further to a 3.1% of GDP deficit in FY2019-20.
• Primary Budget Surplus: A primary budget surplus of 0.1% of GDP is projected for FY2017-18, offering a potential six-month reprieve from a credit ratings downgrade.
• Expenditure Ceiling: The expenditure ceiling was lowered by ZAR 26bn for FY2017-18 and FY2018-19, with the Treasury emphasizing cost-cutting and efficiency improvements.
• Revenue Enhancements: An additional ZAR 13bn in revenue-enhancing measures is expected in the February 2017 budget to offset lower tax revenues.

Economic Outlook

• GDP Growth: The Treasury has revised its GDP growth forecast downward, projecting 0.5% for 2016, 1.3% for 2017, and an average of 1.8% over the medium term. This is seen as lagging behind population growth, raising concerns for rating agencies.
• Inflation Assumptions: The Treasury expects CPI inflation to average 6.1% in 2017 and 5.9% in 2018, which the report considers too pessimistic compared to its own more optimistic projections.
• Fixed Investment: The Treasury forecasts an average growth of 3.4% in fixed investment for 2017 and 2018, but this is viewed as overly optimistic given the structural challenges in the economy.
• Consumption Trends: Household consumption is expected to grow modestly, with the Treasury noting a weaker outlook due to soft VAT collections.

Structural Reforms and Challenges

• Progress on Reforms: There has been little tangible progress on structural economic and state-owned entity (SOE) reforms, which continues to frustrate rating agencies.
• SOE Reforms: No significant new initiatives on SOE reform were announced. The Treasury refers to the reconstituted boards of SOEs like South African Airways (SAA) and South African Post Office but lacks concrete details on their sustainability.
• Contingent Liabilities: Government guarantees amount to ZAR 470bn, posing a significant contingent liability risk. If Eskom requires further support for its nuclear program, this could push the debt-to-GDP ratio above 60%.

Debt and Fiscal Metrics

• Debt Ratios: Gross government debt is projected to rise to 53.0% of GDP by FY2018-19, up from 51.3% in FY2016-17. The foreign debt-to-gross loan debt ratio is expected to increase to 11.0% over the MTEF.
• Borrowing Requirements: The main budget borrowing requirement for FY2016-17 is ZAR 165bn, rising to ZAR 170bn in FY2019-20.
• Net Borrowing: Net short-term loans are expected to increase by ZAR 15bn to ZAR 40bn in FY2016-17, with an average of ZAR 25bn per year over the MTEF.

Key Risks and Concerns

• Rating Agencies: The report suggests that rating agencies may still be concerned about the lack of structural reform progress and the continued deterioration in debt metrics.
• Political Uncertainty: The report notes that politics remains a wildcard, with the possibility of a cabinet reshuffle and the removal of Minister Gordhan before the end of the year, which could impact the country's credit rating.
• VAT Increase: There is a strong likelihood that the VAT rate will be increased in the 2017 budget, as suggested by the optimistic revenue figures in the outer years of the budget.

Summary of Key Points

• Fiscal Strategy: The Treasury has focused on cost-cutting and revenue enhancement to maintain a primary budget surplus and stabilize the deficit.
• Economic Constraints: The economic outlook remains challenging, with weak growth and high inflation expectations.
• Reforms Stagnation: Structural reforms, including labor market and SOE reforms, have not seen meaningful progress.
• Credit Rating Risk: The report warns that the lack of reform and continued debt increase could lead to a downgrade to 'junk' status on 2 December by S&P.
• Political Impact: Political instability could undermine the fiscal strategy and lead to a ratings downgrade.

Conclusion

While the MTBPS demonstrates some fiscal discipline and cost-cutting efforts, the lack of structural reform and the continued deterioration in debt metrics pose significant risks to South Africa's credit rating. The report remains cautious, suggesting that the budget may not be sufficient to avoid a ratings downgrade, particularly if political instability persists.