South Africa seeks to strike balance between pro-growth spending and fiscal discipline

Malusi Gigaba, South Africa’s minister of finance, delivered the Medium-Term Budget Policy Statement (MTBPS) to Parliament on October 25, outlining a mix of partial privatisations and infrastructure spending aimed at spurring economic growth while still pursuing fiscal consolidation.

Partial privatisation of state-owned telco

One state-owned enterprise slated for a partial sell-off is Telkom, the fixed and mobile telephony firm. While this decision was not taken lightly, Gigaba said, it was necessary to maintain the credibility of the budgetary expenditure ceiling.

Although the government has partially divested from Telkom, the state still holds a 39% stake, currently valued at R13bn ($904.3m).

According to Gigaba, the government could undertake other privatisations to help bridge the budget deficit. This opens up the possibility that shares in other state-owned enterprises will be put on the block.

Although the MTBPS notes that the government will have a buyback option as part of the sale of Telkom’s shares, the move has been met with some resistance from large trade unions, including the South African Municipal Workers Union, which voiced disapproval of the proposed sale in October.

Infrastructure spending surge at multiple levels of government

The MTBPS also sets out a more conventional set of measures to help sustain positive growth, including R948bn ($66.1bn) worth of infrastructure investment over the next three years.

Of this, state-owned companies are projected to spend R402.9bn ($28.1bn), with a further R208bn ($14.5bn) of outlays by provincial administrations and R197bn ($13.7bn) by municipalities. This will offer local, regional and national opportunities for the construction sector.

The remainder of the budget will go to other infrastructure maintenance and improvement.

Modest economic growth to constrain tax revenue

Funding some of these capital projects may prove challenging, however, given an expected slowdown in revenues.

The longer-term outlook for commodity prices – and therefore growth – in South Africa remains modest, in Gigaba’s view. GDP growth is projected to be 0.7% this year – and while that marks an increase from 0.3% in 2016, it is down from the 1.3% forecast in February.

More modest economic growth has resulted in revised expectations for tax revenue, which is set to be R50.8bn ($3.5bn) less than the initial projection. As a result, the FY 2017/18 budget deficit is now forecast at 4.3% of GDP, well above the target of 3.1%.

This dip in revenue, combined with various other factors – including the need to recapitalise state enterprises such as South African Airways and South African Post Office – is expected to add to the national debt.

Gigaba told Parliament debt levels are on track to reach 61% of GDP by 2022, 10 percentage points higher than current levels. This will see debt servicing costs account for almost 15% of main budget revenue by FY 2020/21, compared to 13% this year.

Ratings downgrade and bonds sell-off

While MTBPS proposals such as partial privatisation should help address key long-term issues for the government, the resulting upward pressure on debt has led to concerns over the Treasury’s ability to maintain the process of much-needed fiscal consolidation.

In the week following the MTBPS’ release, there was a sustained move out of South African bonds, with foreign investors selling off R11.5bn ($801.9m) worth of paper.

In a statement issued at the end of October, Moody’s warned that the cost of the mid-term proposal to service national debt could crowd out pro-growth expenditure and raise mandatory recurrent spending.

“The absence of fiscal consolidation, both in terms of containing the fiscal deficits and reducing mandatory recurrent spending, is credit negative, undermining debt sustainability and eliminating room for deploying fiscal stimulus in the event of a negative economic shock,” Zuzana Brixiova, Moody’s vice-president, senior analyst and lead sovereign analyst for South Africa, wrote in the statement.

At the end of November Moody’s put South Africa’s investment grade rating under review, a move that surprised many investors who were expecting a downgrade. The South African rand rose by 3.3% immediately following the announcement, partially offsetting S&P’s downgrade of the long-term local currency rating to BB+ a few days before.

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