Moody’s sends warning over South Africa’s shrinking tax base

The loss in government revenue will be much more severe than South Africa’s fall in economic activity, says ratings agency, Moody’s.

In a research note on Thursday (10 September), the group cited government’s June supplementary budget review, which projected a decline in main budget revenue to 22.6% in GDP in fiscal year 2020.

“The loss in revenue will be much more severe than the fall in economic activity. The smaller tax base stemming from lockdown measures, job losses and lower confidence accounts for the vast majority of the revenue shortfall,” it said.

“Tax-relief measures included in the government’s support package are a secondary driver of the revenue loss.”

Moody’s said that under-performing revenue has been a key credit challenge in South Africa for an extended period. At the same time, opposition from influential stakeholders including unions has constrained the authorities’ ability to contain spending in response, it said.

The ratings agency said that the revenue shortfall will further complicate the supplementary budget’s target debt stabilisation by 2023.

On Tuesday (8 September), StatsSA announced that second-quarter GDP had contracted 16.4% quarter-on-quarter, as lockdown measures weighed heavily on economic activity.

The mining, manufacturing and construction sectors were the main drag on the GDP growth rate, as production disruptions saw all three record contractions of close or equal to 30% quarter-on-quarter.

“Although we had already factored such a large drop into our full-year growth forecasts, the downturn will nevertheless intensify the government’s fiscal woes, particularly its ability to generate revenue,” said Moody’s.

“We also expect the shock will trigger a deterioration in asset quality that will erode the buffers of South Africa banks, which were strong pre-crisis.”

Moody’s expects the gradual lifting of pandemic-driven restrictions will support a recovery in economic activity in the second half of 2020.

However, weak consumer and investor confidence, together with renewed load shedding by Eskom will still lead to a 4.2% year-on-year contraction in the second half of 2020, it said.

“As a result, we maintain our expectation for a 6.5% recession for the full year. We expect the recovery will persist through 2021 and support growth of 4.5%. However, the South African economy will not return to the 2019 levels of economic activity until 2023.”


Read: What are the chances of another rate cut in South Africa next week?

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Moody’s sends warning over South Africa’s shrinking tax base