Fiscal slippage has accelerated over the past three years. In 2019, the rescue plan for Eskom, the state-owned power company, for nearly ZAR 60 bn (1% of GDP) further widened the deficit. In 2020, faced with an unprecedented economic recession, the authorities extended the expansionist economic policy with a vast stimulus plan. Estimated at ZAR 500 bn (USD 27 bn, 10% of GDP), the emergency measures considerably increased public spending (at an average annual rate of +9% between FY2018/19 and FY2019/20, compared to the previous fiscal year). Over the same period, revenues declined at an average rate of - 4%, feeding concerns about fiscal deficit and debt dynamics.
The deficit swelled to -9.9% of GDP in FY2020/21 and public debt reached nearly 71% of GDP. The deficit was easily financed at a reasonable cost thanks to increased support from official creditors via low-interest credit lines and greater use of government bond issuance on the domestic market. In 2021, in the context of recovery, the deficit was slightly reduced but the public debt ratio continued to rise.
Optimistic budget forecasts need to be toned down
For the coming fiscal year, the government released at the end of February more favourable budget forecasts than those published in late 2021. Yet this optimism was mainly fuelled by cyclical factors, while structural vulnerabilities persist.
The deficit for FY2021/2022 was revised downwards thanks to the stronger-than-expected growth in fiscal revenue, driven by the upturn in the prices of mining products.
For the fiscal year 2022/23, high prices for South Africa’s main export products (aluminium, gold and diamonds) should result in an even bigger fiscal windfall. In contrast, the government is surprisingly unlikely to raise fuel taxes since it does not want to aggravate the increase in crude oil prices on pump prices.
On the spending side, the government maintained its proposal to control current expenditures, with a 4% increase compared to the previous year. This is in line with the increase in social welfare programmes and the extension of the one-time welfare allowance, set up during the pandemic. For the moment, the ZAR 350 subsidy has been extended through March 2023, for a total cost estimated at ZAR 44 bn (0.7% of GDP). The strategy for consolidating spending depends primarily on controlling public sector wages (which account for nearly 35% of total current expenditures) and the absence of additional transfers to support state-owned companies. The cost of debt servicing remains the fastest-growing expense (+12% a year on average in FY 2022/23 and FY 2023/24), far outpacing the expected nominal growth rate. Consequently, the budget is based on optimistic projections of GDP growth in real terms of 1.9% in FY 2022/23 and 1.7% in FY 2023/24. Yet since the budget was elaborated before the outbreak of the war in Ukraine, we esteem that actual growth will be slower (+1.5% and +1%, respectively, in FY 2022/23 and FY 2023/24 according to our estimates) mainly due to the decline in domestic demand.
The war in Ukraine is triggering higher inflation, which is likely to erode domestic demand. South Africa has few direct trade ties with Ukraine and Russia (0.8% of total imports in 2020), but its status as a net importer of hydrocarbons and grains exposes the country to a general increase in prices and supply chain disruptions. Already present through the impact of the global recovery via higher energy prices, inflation pressures are beginning to spread to other items such as food. Consequently, we have drastically revised our inflation forecasts: we are now looking for inflation of 6.5% in calendar year 2022 and 4.5% in 2023.
