South Africa says it is not focused on austerity. Analysts are not convinced

In what was declared the most crucial budget statement in the history of a democratic South Africa, Finance Minister Tito Mboweni insisted that austerity was not on the government’s agenda.

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

Despite Mboweni’s claims that this “was not an austerity budget”, experts are not entirely convinced and are concerned that the finance minister may have been too optimistic in his forecast of the country’s economic review.

Virag Forizs, African economist at Capital Economics, noted that despite increased revenue expectations, further bolstered by rising rates on alcohol, tobacco and fuels, the government did not appear to use the margin for to water down their fiscal hardening.

“In terms of spending, the restriction seems to be on the agenda. Allocations to fund the country’s vaccination campaign, up to ZAR19 billion (19 billion South African rand), were below previous Treasury estimates, ”he said in a note Wednesday.

South Africa’s fiscal position over the last fiscal year looks slightly rosier than expected, and government revenues are projected to be 1.4% of GDP higher than expected in October. Looking to the future, revenue for 2021/22 is projected to reach 1.35 trillion South African rand ($ 90.46 million), which will increase to 1.52 trillion rand in 2023/24, with revenue and stronger cash balances that will allow the government to finance the deficit reduction.

Mboweni also announced that the government will eliminate the 40 billion rands provided for in tax increases, instead of increasing tax revenues by closing the gaps in the corporate sector and expanding the tax base. It has also earmarked an additional Rs 10 billion for the purchase and distribution of Covid-19 vaccines over the next two years.

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

Annual deficits are now projected to be much lower than previously estimated over the next three years. However, gross loan debt is expected to increase from Rs 3.95 trillion in the current fiscal year to Rs 5.2 trillion during the 2023/24 fiscal year.

Mboweni stressed that despite the sharp drop in revenue and a more optimistic fiscal stance compared to the October statement, public finances are still “dangerously exaggerated.”

“We owe a lot of money to a lot of people,” he said. “They include foreign investors, pension funds, local and foreign banks, unit trusts, financial companies, insurance companies, the Public Investment Corporation and holders of ordinary South African bonds.”

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

GDP is expected to grow by 3.3% this year after a contraction of 7.2% in 2020, averaging 1.9% over the next two years, according to the country’s Treasury.

Forizs added that the implementation of the ANC’s government fiscal consolidation plans faces serious risks, with the government embroiled in a long-running dispute with unions over the freezing of public sector wages, a key goal for spending restraint.

“It will remain a political challenge to maintain spending moderation given the weak economic context. In fact, data released yesterday showed that the unemployment rate reached 32.5% in the last quarter of last year. “Forizs said, noting that GDP growth projected by the government would mean that activity would remain 1.8% below pre-covid levels in 2022.

“In this context, there is a significant risk that the government may not live up to the expectations of investors, which could put pressure on the rand and lead to an increase in bond yields.”

Bank of America said the Treasury had presented a scenario at best that was based on stronger growth in the medium term, with South Africa growing persistently weak in recent years. Public sector wage cuts and structural reforms of state-owned enterprises (SOEs) that are struggling and in debt will also be crucial, and analysts will be cautious about the prospects of all three.

“Our basic case is to keep the wage freeze of R37bn (the full year of 2020), but we assume increases related to inflation of 3-4% from (full year 2021),” they said in a note Thursday.

“We see a union setback in the coming months with the government likely to make some concessions amid possible strike action and local elections. SOE risks persist with global contingent liabilities estimated at 20% of GDP.”