South Africa is at huge risk

The medium-term budget policy statement (MTBPS) delivered by Enoch Godongwana on Wednesday (1 November) showed a major deterioration in South Africa’s fiscal metrics – and the solutions are deeply negative for the country’s credit status.

Key among these metrics are the government’s debt-to-GDP ratio and fiscal deficit projections, which Investec chief economist Annabel Bishop says will hit South Africa’s credit rating when major agencies conduct their reviews later this month.

Godongwana noted that the country’s budget deficit widened by a further R55 billion versus estimates at the time of the February Budget. Revenue collections have also underperformed significantly, with tax coming in close to R57 billion lower than anticipated.

Treasury has responded to this by implementing budget cuts in the near and medium term (R21 billion in the current financial year and a further R85 billion through to 2026).

However, budget cuts are not enough to meet the shortfall, and so Treasury will be turning to borrowing to help, increasing South Africa’s debt.

“Over the medium-term, gross debt is projected to now peak at 77.7% of GDP in 2025/26, versus February’s Budget estimate of 73.6% of GDP for the same year,” Bishop said.

“Worryingly, gross debt is projected to still remain above 70.0% of GDP in 2031/32, and the expanding debt ratio has reduced the sustainability of government finances, with a debt ratio of 60% of GDP instead seen as the maximum sustainable debt ratio for an emerging market economy.”

Indeed, the Treasury itself warned about the country’s growing debt bill, noting that debt service costs have increased by R52 billion above the amount budgeted in February and that the country is now spending more on servicing debt than on healthcare, public services and social development.

Citadel Chief Economist and Advisory Partner, Maarten Ackerman said that the tipping of the debt-to-GDP is concerning, but South Africa should be able to avoid a debt-spiral considering that a ratio of 90% was considered the tipping point.

However, he warned that a study by the World Bank found that countries whose debt exceeds 77% as a percentage of the size of the economy for prolonged periods of time experience significant slowdowns in economic growth – something South Africa cannot afford given the already weak growth environment.

Regardless, the escalating debt problem will not go unnoticed.

Bishop said the budget is credit negative, with the risk of credit rating downgrades having risen for South Africa, and the three key rating agencies, Fitch, Moody’s and S&P to potentially give their country reviews this month.

Market reaction

The expenditure cuts have been favourably received by the markets, along with planned tax measures to raise revenue, as lower commodity prices and higher VAT refunds weakened revenue.

“While personal income tax collections have seen resilience this year, National Treasury warns on the weak outlook for employment, while corporate taxes have already seen significant under collection this year, and this is anticipated to continue out to 2026/27,” Bishop said.

The rand has strengthened in relief at the modest nature of the proposed tax measures.

Bishop said that the additional R15 billion is likely to come from no change to tax brackets to account for bracket creep (the effect of higher inflation on earnings), with the tax buoyancies estimated lower over the medium-term.

The rand is also stronger as markets are relieved at signs of government restraint – although the credit rating agencies are likely to place the country back on negative outlooks, with risks for downgrades.

“The budget is likely the best it could be in the current circumstances but is a poor budget from a fiscal consolidation point of view, with the debt ratios projected substantially higher than in February’s Budget Review,” Bishop said.

Read: Tax hikes incoming as South Africa’s budget falls short