20181016-法国巴黎银行-South_Africa_MTBPS_preview_–_time_for_trade-offs_9页_1mb

South Africa MTBPS Preview Summary

Core Content Overview

This report provides an analysis of South Africa's upcoming Medium-Term Budget Policy Statement (MTBPS) on 24 October 2018. It outlines the likely fiscal strategy of the newly appointed Finance Minister, Tito Mboweni, and evaluates the challenges and implications of the country's fiscal consolidation efforts in the context of a weak macroeconomic environment.

Main Budget Deficit and Debt Outlook

• Main Budget Deficit for FY2018-19: Expected to slip to 4.2% of GDP from the previous estimate of 3.8% of GDP, due to underperformance in economic activity.
• Medium-Term Deficit Trajectory: The deficit is projected to narrow to 3.5% of GDP by FY2021-22, aligning with the February 2018 national budget forecasts.
• Debt-to-GDP Ratio: The government aims to keep the gross debt-to-GDP ratio below 60% in the medium term. A breach could lead to an adverse rating outlook from Moody's.

Fiscal Prudence and Expenditure Reprioritisation

• The new finance minister is expected to reaffirm the Treasury's commitment to fiscal prudence.
• A ZAR50bn reallocation in the government spending framework is anticipated, with a focus on infrastructure and service delivery improvements.
• The "stimulus plan" is likely to involve trade-offs between underperforming programs and growth-enhancing initiatives, especially in local and provincial government.
• Local government is expected to be a major area of focus for expenditure reallocation, given historical issues with underspending and wasteful expenditure.

Revenue Performance and Challenges

• Tax Revenue Growth: Tax revenues have shown resilience, with a 11.2% year-on-year increase YTD, largely driven by a 20% increase in VAT revenues due to the 1% rate hike in April.
• Corporate Income Tax (CIT): CIT collections have underperformed, increasing by just 2.8% y/y, reflecting weak corporate profits and negative domestic investment.
• Other Revenue Sources: Customs duties and fuel levy revenues have provided some support to the overall revenue performance.
• Fiscal Outlook: The tax buoyancy index remains weak, and the National Treasury's assumptions are considered too optimistic given current macroeconomic conditions.

Implications for Rating Outlook

• Moody's Rating Decision: Moody's is expected to delay its rating decision until after the MTBPS, likely maintaining a stable outlook on the sovereign if the Treasury delivers a balanced fiscal strategy.
• Key Criteria: A primary budget in balance by FY2020-21 and debt metrics below 60% of GDP are seen as non-negotiable to avoid an adverse rating change.

Funding and Debt Management

• Domestic Issuance: Higher deficit numbers may lead to a modest increase in domestic bond issuance.
• Switch Auctions: The Treasury may use more frequent switch auctions to fill the funding gap, though these could increase debt service costs.
• Refinancing Strategy: The strategy remains focused on minimising refinancing risk and diversifying issuance.

Key Challenges and Considerations

• Service Delivery: Infrastructure spending is expected to be a key focus to improve service delivery ahead of the general elections in Q2 2019.
• Local Government Efficiency: Improving efficiencies in local and provincial governments will be challenging, particularly in underperforming departments.
• State Capture: The government's efforts to clean up the state and root out state capture will require strict enforcement of conditional grants and fiscal discipline.

Conclusion

The MTBPS is expected to focus on fiscal consolidation, expenditure reallocation, and service delivery improvements. While near-term deficit slippage is anticipated, the medium-term fiscal path is expected to remain on track, provided the Treasury manages the complex trade-offs between growth and fiscal restraint. The rating outlook will depend on how effectively the government can balance these priorities and maintain fiscal discipline.