Gigaba paints a picture of gloom
Finance Minister Malusi Gigaba’s maiden medium-term budget in parliament received a pummelling from the market as the deficit ballooned, revenue collection tanked, spending breached its limits and debt soared to unprecedented levels.
By 5pm, the rand had gone through R14 to the dollar after trading at R13.73 before Gigaba began speaking.
Economists said the budget had increased the chances that South Africa’s credit ratings would be taken down to junk status when the ratings agencies provided an update next month.
The medium-term budget policy statement projects that the deficit before borrowing for 2017-18 will rise to 4.3% from the 3.1% target in the February budget.
Spending will be R3.9-billion higher than anticipated and revenue will fall short by R50.8-billion, higher than most in the market had expected.
Growth estimates for the year have been revised down from 1.3% to 0.7%.
Most alarming, though, was the dramatic increase in the debt burden, which will soar to 60.8% of gross domestic product (GDP) by 2022, according to the Treasury, way beyond the stabilisation level of 52.9% next year promised in February.
The government’s policy objective since 1994 had been to reduce debt from the 49.5% level it inherited after apartheid.
That project has been undone, with the debt burden now at an unprecedented level and interest costs heading up to 15% of revenue over the next three years.
In a medium-term budget policy statement that was bleaker but more candid than many had anticipated, Gigaba kicked the can down the road, delaying all major decisions on the budget until February.
He told parliament he was giving an honest view.
“It is not in the public interest, nor is it in the interest of government, to sugar-coat the state of our economy and the challenges we are facing,” he said.
“Our resolve is to remain on course and not to deviate irretrievably from the fiscal consolidation agenda we embarked on a few years ago.”
Overall, the public finances showed a steep deterioration, with wages for public servants – particularly in health and education – and debt costs crowding out other spending.
The breach in the expenditure ceiling was due to the bail-out of stressed state-owned enterprises, in particular the total of R13.7-billion transferred to SA Airways and the SA Post Office.
However, the government remains intent on disposing of state assets to bring spending back within the ceiling by March.
That could include a portion of the government’s Telkom shares, which could be sold with an option to buy them back at a later stage, Gigaba said.
His statement said a new course must be charted, or the country could remain caught in a cycle of weak growth, mounting government debt, shrinking budgets and rising unemployment.
However, most decisions were deferred to the newly established President’s Committee, a small group of cabinet ministers, which will make recommendations to the president on expenditure reprioritisation and asset sales.
Gigaba said the purpose of the new committee was to take hard decisions, including on revisions to spending and the tax framework ahead of the February budget. BNP Paribas economist Jeff Schultz said plans for fiscal consolidation seemed to have been largely abandoned.
“Debt service costs are set to climb rapidly alongside embattled SOEs [state-owned enterprises], which look to remain a drag on the fiscus.
“Plugging rising debt-to-GDP ratios which are now on average four percentage points higher over the medium-term is highly unlikely without higher growth.”
Patrice Rassou, head of equities at Sanlam Investments, who now expects downgrades to local and foreign currency ratings by S&P and Moody’s next month, said: “There is no fiscal consolidation.”
He also expects tax hikes in next year’s budget.
Nelson Mandela Bay mayoral committee member Retief Odendaal said his immediate impression of the speech was that not nearly enough was going to be done to curb government spending.
“An obvious concern was the SAA bailout,” he said.
“The country’s mounting debt and the ability to serve this debt going forward is a major concern.”
Nelson Mandela Bay Business Chamber acting chief executive Prince Matonsi said: “We are deeply disappointed by the [downward revision] of the economic growth projections and the projected tax revenue shortfall of R50.8-billion.
“We are not entirely convinced by Minister Gigaba’s plans to resolve this setback in fiscal consolidation and would have liked more detail in his speech.”
National African Federated Chamber of Commerce Bay chairman Lithemba Singaphi said: “The minister’s speech made good sense to some extent and it has come at a crucial time.
“Economic growth was clearly one of the biggest challenges highlighted by the minister and, in his budget speech next year, we will want to know how he is going to deal with the challenges – and specifically how he is going to assist education.”
– Additional reporting by Moyagabo Maake, Sunita Menon and Shaun Gillham