Supplementary Budget Review & Inflation sinks to 3% in April 2020 under lockdown

Initial impressions

In our view, Treasury’s growth and inflation forecasts are realistic at an average of negative 0.4% and 3.9%, respectively, for the next four years
Budget deficit at 15.7% of gross domestic product (GDP) for FY20/21 came out at the higher end of the Bloomberg consensus range of between 10% and 15.9% è fiscal deficit is expected to be 4.2% wider on average in the medium-term expenditure framework (MTEF) between FY20/21 and FY22/23
Expansionary budget initially as real expenditure growth outstrips revenue growth - government expects cuts in expenditure in the remainder of the MTEF to narrow the deficit to 7.7% by FY22/23
Relative to the February 2020 national budget, revenue collection was revised lower by R716.7 billion in the MTEF è while expenditure was adjusted lower by a lesser R174.6 billion
Insufficient detail outlining concrete action on proposed structural reforms to enhance the recovery

Immediate market effect

Given updated views from treasury on the weekend, markets easily digested the news of a larger fiscal deficit with a sideways movement in the equity, fixed income and currency markets

Government debt expected to stabilise in FY23/24, but adjustments are necessary

Initial deterioration in SA’s government debt ratio is due to a R299 billion revenue shortfall (main budget) and an additional R43.2 billion allocation to expenditure in FY20/21
Gross debt ratio expected to rise to 86% in FY22/23 (previously 71.6%) - on average the debt ratio is expected to be 14.5% higher over the MTEF
Primary balance remains in deficit during the MTEF - it is expected to narrow to 2.3% by FY22/23 (previously 1.1%) from 9.7% in FY20/21 (previously 2.6%) è expected to print a surplus in FY23/24
Debt-service costs absorb 21c of every rand government collects relative to 9c in FY08/09 - interest bill expected to rise from 4.9% of GDP in FY20/21 to 5.4% of GDP in FY22/23 - the allocation to debt-servicing costs is similar in size to what government spends on health and is double the share being spent on capital assets
Measures to narrow the budget deficit and stabilise debt will be announced in the October 2020 medium-term budget policy statement (MTBPS)

Cost reductions, above efforts to reduce the wage bill, are required

Treasury has attempted to reopen the final year of the current wage agreement to achieve R37 billion in savings - the proposed savings of R55 billion in FY21/22 and R67 billion in FY22/23 are arguably
more crucial
Treasury claimed that failure to achieve R230 billion worth in savings (beyond the projected cuts to the civil servant wage bill) would result in even larger cu