South Africa says it is not fixated on austerity. Analysts were not convinced

In what has been tipped as the most crucial budget statement in the history of a democratic South Africa, Treasury Secretary Tito Mboweni emphasized that austerity was not on the government’s agenda.

While the country appears to be emerging from the economic chaos created by the coronavirus pandemic and a pre-existing dilemma of debt and structural weakness, Mboweni said his plan was on track to bring South Africa back to a primary surplus government’s main budget in 2024/25.

Despite Mboweni’s claims that this was “not an austerity budget,” experts are not fully convinced, fearing that the Treasury Secretary may have been overly optimistic in his forecast for the country’s economic overhaul.

Virag Forizs, Africa economist at Capital Economics, noted that despite increased revenue expectations, further bolstered by higher excise duties on alcohol, tobacco and fuel, the government did not appear to be using the space to ease its fiscal tightening.

“On the spending side, reluctance seems to be the order of the day. Allocations to finance the country’s vaccination campaign, up to ZAR 19 billion (19 billion South African rand), were lower than previous Treasury estimates,” she said Wednesday. in a note.

South Africa’s fiscal position for the past fiscal year looks a little brighter than expected, with government revenues expected to be 1.4% of GDP higher than expected in October. Looking ahead, revenues for 2021/22 are expected to reach 1.35 trillion South African rand ($ 90.46 billion) rising to 1.52 trillion rand by 2023/24, with higher revenues and cash balances pushing the government into the deficit can reduce.

Mboweni also announced that the government will cut a planned Rand 40 billion in tax increases, instead increasing tax revenues by closing loopholes in the corporate sector and broadening the tax base. It has also allocated an additional 10 billion rand for the purchase and distribution of Covid-19 vaccines over the next two years.

“We owe many people a lot of money.” – Tito Mboweni, South African Finance Minister

Annual shortages are expected to be much lower than previously estimated for the next three years. However, gross loan debt is expected to increase from Rand 3.95 trillion in the current fiscal year to Rand 5.2 trillion in fiscal year 2023/24.

Mboweni stressed that despite the revenue windfall and a more optimistic fiscal position compared to the October statement, public finances are still “dangerously overburdened”.

“We owe many people a lot of money,” he said. “These include foreign investors, pension funds, local and foreign banks, unit trusts, financial institutions, insurance companies, the Public Investment Corporation and common South African bondholders.”

The government hopes that its structural reform agenda, aimed at “lowering barriers to entry, increasing productivity and lowering the costs of doing business”, will help to recalibrate the South African economy.

According to the country’s treasury, GDP is expected to grow by 3.3% this year after shrinking from 7.2% in 2020, to an average of 1.9% over the next two years.

Forizs added that the implementation of the ANC’s prevailing budget consolidation plans poses serious risks, with the government embroiled in a long-running dispute with unions over a contentious public sector wage freeze, a key target for spending containment.

“Given the weak economic backdrop, it remains politically challenging to keep spending restrained. Data released yesterday indeed showed that the unemployment rate was 32.5% in the last quarter of last year,” Forizs said, noting that the growth of the GDP projected by the government would mean activity will remain 1.8% below pre-Covid levels by 2022.

“Against that background, there remains a significant risk that the government will not be able to live up to investor expectations, which could put pressure on the rand and cause bond yields to rise.”

Bank of America said the Treasury had presented a best-case scenario relying on stronger medium-term growth, with growth in South Africa having been persistently weak in recent years. Public sector wage cuts and structural reforms of the country’s ailing and debt-ridden state-owned enterprises (SOEs) will also be critical, with analysts cautious about the outlook for all three.

“Our base case scenario is that the R37bn wage freeze (for full year 2020) is maintained, but assuming 3-4% inflation-linked increases from (full year 2021),” they said in a note Thursday.

“We see unions cut back in the coming months, with the government likely to make some concessions amid potential strikes and local elections. The risks posed by state-owned enterprises remain with contingent liabilities estimated at about 20% of GDP.”