Fitch says South Africa’s prospects for reaching fiscal goals improve.
By Lehlohonolo Lehana.
Fitch Ratings says that South Africa’s economic prospects are improving, thanks to a better than expected financial performance in the second quarter – but it warns that crucial social and political issues remain.
Fitch said in a note on Tuesday (21 September), that a robust economic performance and stronger-than-expected fiscal revenue in recent months mean that South Africa’s budget deficit in the fiscal year ending March 2022 (FY21/22) will be smaller than the government’s projections in February 2021.
Economic growth in the second quarter of the year was stronger than expectations at 1.2% quarter on quarter, it said, while the government has also revised up earlier quarterly growth rates.
The August 2021 manufacturing purchasing managers’ index (PMI) and mobility data also point to a strong recovery in activity following disruption in July caused by the most severe riots in decades, it said.
Fiscal revenue has grown strongly (up 54% year on year), government revenue was boosted by the low base of 2020, inflationary pressures appear manageable, and a revision on GDP to a new base year of 2015 saw production numbers grow by 11%, the group said.
"Reflecting these recent developments, we have raised our forecast for economic growth in 2021 to 5.3% from 4.9% previously," Fitch said.
However, the group pointed to some concerns, including growth sustainability. Much of the current data is off a low base, the firm said, and may not indicate momentum on the upside.
"Central government revenue growth during the period was boosted by the low base in 2Q20 – when activity and tax collection were badly affected by a strict lockdown – and will come down in the coming months.
"Notably, revenue from mining, which has been strong in recent months, will slow as the commodity price environment becomes less supportive. However, CG revenue growth looks set to substantially exceed the 12.6% projected for FY21/22 in the budget," Fitch said.
While the rebased GDP figures will lower the general government debt/GDP ratio for FY20/21 to 79.3% from 82.5%, it remains well above the 2020 median for 'BB' sovereigns of 59%. Moreover, the revision itself will not affect the direction of debt in the future, the ratings firm said.
The more significant issues revolve around the ANC-led government – specifically, how it is dealing with the wage bill, state-run companies, and the pressures it may face at the polls in the coming elections.
"The deal with public-sector workers in August entails a slightly lower wage increase than we had assumed in May, alleviating budget pressures in the near term," Fitch said. However, this deal only covers one year.
This leaves greater uncertainty over the medium-term path of spending," it said.
Meanwhile, the social unrest in July increased pressure on the government to raise support for the poor – pressure that could rise further if the ANC performs poorly in municipal elections in November, Fitch said.
"The ANC leadership has agreed on the need for a basic income grant in principle. We believe its cost will make implementation unlikely in the next few years. Higher social spending, if introduced, could be offset by revenue measures, but these might not fully cover expenditure and could weigh on economic growth."
The ratings firm also flagged further financial assistance to troubled state-owned enterprises – including the ailing national electricity company Eskom – as something that will likely continue to weigh on public finances.