On the back of projected GDP growth of 5% thanks to the global economic recovery, a lacklustre budget for 2021/22 will have significant consequences for South Africa.
Economic tailwinds that could help South Africa’s recovery this year should not deflect the finance minister’s attention away from his cost-cutting crusade. This is the view of Old Mutual Investment Group chief economist Johann Els.
With the annual budget to be delivered on 24 February, he said that staying the course will be vital to reigning in debt and spurring investor confidence.
“What I want to see from the minister is a continued focus on expenditure by cutting the wage-bill, although I suspect that non-wage expenditure can be cut a little more. We need to see an absolute commitment to this fiscal consolidation path continuing and the stabilising of the debt ratio,” Els said.
The current fiscal year’s deficit could be smaller by around R155 billion compared to the October Medium-term Budget Policy Statement (MTBPS) projections, the result of tax overrun and reduced spending. That is a 12.5% deficit on the consolidated budget basis versus the 15.7% deficit envisaged in October.
This means the debt-to-GDP ratio could peak around 92% versus Treasury’s projected 95%.
“The fact that the local economy will recover quite substantially in 2021 on the back of a robust global growth takes away a lot of the growth pressures. So, my concern for the year is our approach to managing Covid-19 and the rollout of vaccines as this could derail the sharp rebound. Treasury, and government, should not squander this opportunity.”
Els said that a stalling vaccine rollout is a threat that could be eradicated if an effective and co-ordinated partnership was struck between the public and private sectors.
“Other developed economies have struggled with their rollout, but in a country like South Africa we could involve the private sector more. This is important because an effective response will impact the infection cycle allowing the economy to open up fully. It will also impact heavily on investor confidence.”
With ratings agencies Fitch and Moody’s having downgraded the country further into junk in 2020, all eyes will be on finance minister Tito Mboweni this year. Should he show signs of deviating from the stated path of cutting expenditure, markets are unlikely to respond kindly.
Els is equally confident that Eskom will be able to bolster capacity sufficiently to put an end to load shedding by early 2022.
However, this won’t count for much if the budget points to a weakening of the commitment to cost-cutting reforms.
“I think the current political leadership is strong enough to continue for now on the fiscal consolidation path,” Els said. “But if that leadership turns out to not to be strong enough, further policy implementation will be lagging.”
Should this happen, it would represent a missed chance considering the opportunity offered by the global economy’s growth spurt this year.
And with a projected conservative tax revenue overrun of some R46 billion in 2020 (the actual outcome could potentially be much higher, around R106 billion), reducing the debt burden may not need extreme measures, said Els.
These efforts will be helped further by higher economic growth this year, which also improves tax revenues.
“There’s a lot of positive news coming through regarding global economic growth, and that’s very positive for South Africa and our fiscal situation,” Els said.
“So, I expect we will see 5% GDP growth this year on the back of this very strong and supportive global environment. And that will have a positive impact on the economy, our balance of payments and exports.
“I think there’s upside potential for National Treasury’s forecast for this year as they tend to be fairly conservative in their tax revenue forecasts,” said Els.
“In addition, Treasury’s deficit path over the next few years could be improved on; instead of reaching 7.3% by 23/24, we could lower that to around 5% by 23/24. This places us in an environment where it’s slightly easier to get onto a fiscal consolidation path.”