The FINANCIAL -- Fitch Ratings-London - The South African budget showed the government's fiscal consolidation plans are on track, despite weaker GDP growth, financial market volatility and forthcoming elections, says Fitch Ratings. Medium-term fiscal and economic challenges remain, however.
By maintaining nominal expenditure ceilings (in terms of main budget, non-interest spending) as set out in the 2012 budget, combined with some revenue over-performance, Minister of Finance Pravin Gordhan was able to revise down budget deficit forecasts. The National Treasury forecast the national budget deficit at 4.0% of GDP for 2013/14, down from 4.2% in October's Medium-Term Budget Policy Statement (MTBPS), 4.0% in 2014/15 (from 4.1%), 3.6% in 2015/16 (from 3.8%) and 2.8% in 2016/17 (from 3.0%).This is a contrast to recent budgets, where deficit projections have tended to be revised upwards.
Nevertheless, the National Treasury projects net national (central) government debt to rise from 39.7% of GDP in 2013/14 and stabilise at 44.3% of GDP in 2016/17, marginally higher although earlier than the 44% of GDP in 2017/18 in the MTBPS. Gross national government debt is projected to reach 48.3% of GDP in 2016/17.
The government is seeking to steer a course between fiscal consolidation that would stabilise the debt ratio, and supporting the subdued economy, which is growing below potential and being buffeted by shocks. Meeting budget deficit targets over the medium-term will be challenging and depend on a revival in GDP growth and shrinking expenditure from 33.2% of GDP in 2013/14 to 31.9% in 2016/17, despite strong social pressures and moderately rising debt interest costs. This highlights the difficult decisions the government will face, particularly if growth continues to underperform expectations.
The National Treasury revised down its forecast for GDP growth for 2014 to 2.7% (from 3.0% in the MTBPS) while maintaining its forecasts for 2015 at 3.2% and 2016 at 3.5%. The outturn for 2013 of 1.9% was less than the forecast of 2.1% in the MTBPS, but tax revenues were ZAR4bn higher than expected. The Treasury is forecasting little narrowing in the current account deficit (from 6.1% of GDP in 2013 to 5.9% in 2014 and 5.8% in 2015), despite the depreciation of the rand.
Material slippage against budget targets or a failure to narrow the current account deficit would lead to rising public and external debt ratios and put pressure on the sovereign rating. A significant and sustained reduction in the twin deficits could lead to positive rating action.
The budget restated the importance of the National Development Plan (NDP). It also spoke about re-prioritising spending, with a shift towards education and infrastructure. A white paper on National Health Insurance and Treasury paper on its financing will be presented in cabinet soon. Announcements related to the Davis Tax Committee's review of South Africa's tax policy framework were limited to small businesses.
We would expect a clearer picture of the political will and capacity for structural reform to emerge after parliamentary and presidential elections in May. Faster GDP and employment growth, for example, bolstered by structural reforms such as those in the NDP, would help to support creditworthiness.
Fitch affirmed South Africa's foreign currency sovereign rating at 'BBB' with a Stable Outlook on 18 December 2013. The next scheduled review of the rating is on 13 June 2014, according to Fitch Ratings.