• Herman van Papendorp

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