Budget Depicts Havoc Virus Wreaked on South Africa’s Economy
South African Finance Minister Tito Mboweni delivered a grim assessment of the nation’s finances in a special adjustment budget that forecast a deep recession and plunging tax revenue.
Gross domestic product is forecast to shrink 7.2% this year, the most in almost nine decades, and the consolidated budget deficit is expected to surge to 15.7%. While gross debt-to-GDP is to peak at 87.4% in four years, investors were cheered by a pledge to cut spending and bring borrowing under control.
“We have accumulated far too much debt; this downturn will add more,” Mboweni said Wednesday in a speech to lawmakers in Cape Town. “Our Herculean task is to stabilize debt.”
Yields on benchmark 10-year government bonds fell as much as 16 basis points to a two-week low. The rand weakened as Mboweni spoke, before erasing most of the decline.
South Africa was already mired in recession and contending with power shortages when the coronavirus pandemic struck. Turnaround efforts were upended when the government imposed a stringent lockdown in late March to try slow the disease’s spread. While some restrictions have since been eased, many businesses have gone bust and widespread job losses are set to worsen a 30.1% unemployment rate.
“The debt level for our sized economy are now at an unsustainable level,” said Isaac Matshego, an economist at Nedbank Group Ltd. “We’ve been there for a couple of years, but now we have really entered red territory. Once we have passed this shock of Covid-19 pandemic, government will really have to show even greater commitment to revising economic growth and reducing its very high level of debt.”
The government cut its revenue projection for the current fiscal year to 1.12 trillion rand ($64.6 billion), from 1.43 trillion rand it estimated in February. An additional 40 billion rand in tax will be raised over the next four years, while spending will be cut by 230 billion rand over the next two years to contain debt. Details will be announced in the 2021 budget speech.
The government intends borrowing $7 billion from international financial institutions, including $4.2 billion from the International Monetary Fund. The lender and the Treasury are in protracted negotiations and “it’s critical that nothing is done to undermine the national sovereignty” in these talks, Mboweni told reporters after the budget speech.
Some members of the ruling party and labor groups initially opposed plans to approach multi-lateral lenders for help, saying the conditions attached to that could threaten the country’s sovereignty. ANC leadership supports these requests for support and IMF staff will make a submission about South Africa’s funding early in July, Mboweni said.
The government has already secured a $1 billion loan from the New Development Bank and Mboweni said the World Bank support is likely to follow approval of the IMF funding.
Peter Attard Montalto, head of capital markets research at advisory service Intellidex, doesn’t see the Treasury’s goal of stabilizing debt by the 2024 fiscal year as credible.
“You can’t just decide to do these things, you have to take the decisions to achieve that, and this will not be possible,” he said.
The supplementary budget redirected money to programs aimed at containing the fallout from the pandemic, with the health department given an extra 21.5 billion rand to build field hospitals and hire more staff, and 12.6 billion rand to other entities involved in tackling the disease. It also provides 40.9 billion rand to support vulnerable households for six months, 20 billion rand to shore up municipal finances and 12.5 billion rand to education.
The Congress of South African Trade Unions, the country’s largest labor group and a member of the ruling coalition, said it was “extremely disheartened and disillusioned” by the budget, which was unfit for a country with mass unemployment.
“We are now in danger of entering an economic depression and the scariest thing is that government does not have a plan,” it said in a statement. “This budget only served to remind us that as workers we are on our own and the policy makers have no idea what they are doing.”
What Bloomberg’s Economist Says
“We think the Treasury’s overall outlook is too optimistic, especially the ambitious plans to cut the deficit. By consolidating too soon and too aggressively, the Treasury will undermine the economic recovery and increase the risk of a future debt crisis.”
--Boingotlo Gasealahwe, Africa economist
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