Special Update: Medium Term Budget Policy Statement

SA economic woes


Main points:

  • Economic growth and inflation rates revised significantly lower.
  • Tax revenue collection shortfall of R52bn in 2019/2020.
  • Debt to GDP ratio rises above 70% over the medium term and continues to rise thereafter.
  • Moody’s wouldl likely change the outlook from stable to negative on 1 November followed by a downgrade in 2020 if no reforms are implemented.
  • Bond yields will likely rise and the Rand will weaken against the US dollar although it appears that the negative rating action is largely priced in already.


Isaah Mhlanga, chief economist at Alexander Forbes broke down the mini-budget as tabled by Minister of Finance, Tito Mboweni

Fiscal unsustainability to trigger negative rating action and market sell-off

The Medium Term Budget Policy Statement (MTBPS) highlights the unsustainability of the debt trajectory and shows that it has worsened significantly, even after removing the impact of Eskom’s bailouts.

The downward revisions in economic growth, tax revenue collections, more bailout provisions for Eskom and other state-owned enterprises (SOE) would still see expenditure cuts remaining on the margin. The fiscal challenges extend beyond Eskom and will require political will to resolve.

Economic outlook has deteriorated as expected

The economic growth forecast had been revised to 0.5% in 2019. It is expected to gradually rise to 1.2%, 1.6% and 1.7% in 2020, 2021 and 2022 respectively. These forecasts are significantly lower than those presented in the February Budget Review.  The lower inflation expectations imply that nominal GDP growth will be lower than budgeted.

The budget assumed a tax buoyancy rate of 1.31 in 2019, followed by 1.17 and 1.08 in 2020 and 2021. However, for the past three fiscal years, tax buoyancy has averaged 0.96. Tax buoyancy rates were overestimated, especially in an environment of weak economic growth, high unemployment and declining corporate profitability. SARS warned  a few weeks ago that there is a high probability that tax collections will disappoint relative to the budget. In line with this, tax buoyancy rates have been reduced to approximately 1.0.

Fiscal trajectory unsustainable with or without Eskom financing included

There would will be a sizeable revenue shortfall of R52.2bn in the current fiscal year, R84bn in 2020/21 and R114.7bn shortfall in 2021/2022. The debt to GDP ratio rises to 60% in 2019/2020 from an estimate of 57% in the budget. If  Eskom financing is included, it rises to 71.3% the next year.  In both these scenarios, debt to GDP ratio rises above 75% in the next decade.

This is the problem: the debt trajectory is not stabilising, even at a 3% growth rate, implying that the fiscal problems extend beyond Eskom. The onus is now on the government, labour and civil society to implement the economic reforms required to lift economic growth and reduce the fiscal burden caused by inefficient SOEs. Most of the reforms, if implemented, are only going to yield results,’ in two years’ time.

We expect Moody’s to change the outlook on its Baa3 rating of South Africa to negative from stable on 1 November 2019 followed by a downgrade in 2020. Bond yields would likely rise and the Rand would weaken against the US dollar. However, both the bond and currency markets appear to have already priced in a potential negative credit rating action.

Should Moody’s take negative rating action as we expect and markets sell-off, markets would likely recover over the next 12 months. This would depend on the speed of implementation of growth-boosting economic reforms. In the absence of these growth-boosting economic reforms, any sell-off in markets would likely constitute a re-rating of the country’s risk assessment.

Edited for style



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