Public Debt in South Africa

South Africa - Public Debt

Government presents improved consolidation path, yet still relies on public wage cuts

On 24 February, the government presented the budget for FY 2021–2022—which begins on 1 April—to Parliament, sticking to its commitment to fiscal consolidation and debt stabilization. An improved macro outlook and higher-than-expected revenues compared to the medium-term budget statement in October 2020 have improved the projected fiscal trajectory. However, the viability of the stabilization plan relies on successful public sector wage negotiations, as a reduction in the public wage bill is still central to the government’s aim, while other political and structural factors pose additional challenges.

The policy document revised the government’s forecast for the consolidated budget deficit to 14.0% of GDP for the current fiscal year (April 2020–March 2021), from 15.7% of GDP in October. This reflected better-than-expected revenues since October amid a bounce-back in mining commodity prices and a stronger-than-expected recovery in domestic demand. The improvement on the revenue side, coupled with more favorable adjustments to the growth outlook, led the government to narrow its projection of the fiscal deficit for the coming fiscal year to 9.3% of GDP (October: 10.1% of GDP), and 6.3% for FY 2023–2024 (October: 7.3% of GDP). Moreover, against this backdrop, the government scrapped the ZAR 40 billion (USD 2.8 billion) in planned tax increases, and adjusted the income tax thresholds by more than inflation, thus providing some relief to households. Meanwhile, on the spending side, the government allocated ZAR 9.0 billion (USD 600 million) to a free Covid-19 vaccine program.

The government also reduced its public debt forecasts to 80.3% of GDP for the current fiscal year, from 81.8% of GDP in October. Meanwhile, the peak and stabilization of debt is now seen at 88.9% of GDP in FY 2025–2026, compared to 95.3% of GDP projected in the October statement. The Treasury aims to achieve a primary surplus by FY 2024–2025—a year earlier than expected in the October budget—chiefly through cuts to the public wage bill and the phasing out of Covid-19-related spending.

That said, a successful consolidation path hinges heavily on tough negotiations with public sector trade unions, which will begin later this year. Moreover, social and political factors, such as high levels of inequality and stark divisions within the governing African National Congress, will present hurdles for large cuts to expenditure.

Commenting on the feasibility of the government’s consolidation plan, Andrew Matheny, economist at Goldman Sachs, noted:

“We maintain our assessment that the main risk stems from wage negotiations that will unfold in the coming months and that will shape the actual wage settlements (outcomes that risk being materially higher than the nominal wage freeze that the National Treasury proposes).”

Moreover, analysts at Fitch Ratings highlight further obstacles:

“The government will face other challenges in meeting its fiscal consolidation goals. Structural bottlenecks continue to hold back medium-term growth prospects, although we forecast GDP growth to rebound to 3.6% in 2021, mostly reflecting base effects and the sharp recovery in mining prices. Weak growth will complicate the authorities’ efforts to reduce the budget deficit while simultaneously attempting to tackle exceptionally high social inequality and elevated unemployment. Meanwhile, the potential need to extend further financial assistance to troubled state-owned enterprises, including the ailing national electricity company Eskom (B/Negative), presents material downside risks to public finances.”

FocusEconomics Consensus Forecast panelists see the fiscal deficit reaching 10.8% of GDP this year, before easing to 9.1% of GDP in 2022.