South Africa's fiscal landscape is facing challenges with the potential for credit downgrades from Fitch, Moody's (NYSE:MCO), and S&P due to growing debt concerns. The gross debt is expected to peak at 77.7% of GDP in 2025/26, posing a significant threat to the sustainability of government finance. This comes as the 2023/24 fiscal year experienced a revenue reduction of -R56.8bn, leading to an inflated budget deficit of -4.9% of GDP.
Looking ahead, future years project deficits at -4.6%, -4.2%, and -3.6% of GDP respectively. The gross debt is anticipated to hover over 70% of GDP until 2031/32. Despite robust personal income tax collections, corporate taxes are underperforming and are projected to continue this trend until 2026/27.
The South African government's decision to ramp up renewable energy infrastructure, increase public servant remuneration, and extend the Social Relief of Distress Grant has contributed to reduced revenue projections for 2024/25 and 2025/26 by R152bn. Meanwhile, only R85bn has been cut from expenditure, adding further strain on the budget.
External factors such as higher VAT refunds, increasing bond yields, and rand depreciation are also contributing to the financial strain. The strength of the rand is influenced by decisions made by the US Federal Reserve. Additionally, factors like a declining tax-to-GDP ratio and bracket creep are affecting tax measures.
These fiscal projections form part of the Medium-Term Budget Policy Statement (MTBPS), triggering a mixed market response and affecting rand strength, according to Investec's chief economist.
In contrast to these projections, had predicted a FY23-24 fiscal deficit of 5.5% of GDP and gross debt peaking at 77% of GDP by FY2025-26. Given the lower deficit, minor increases in domestic debt issuance are expected. However, expressed skepticism regarding the likelihood of a sub-5% deficit and anticipates adjusted funding metrics in the February 2024 budget.
Barclays (LON:BARC) emphasized the importance of wage and social benefit cuts for fiscal rectitude. In terms of foreign exchange, Barclays views the South African rand as overpriced and exposed to global risk, considering its high beta to USD and South Africa's historically low policy rate differential, implying low carry.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.