With domestic financial markets likely to be swept along by the US election in early November, South African-specific events are back in focus this week, with the tabling of the Medium Term Budget Policy Statement (MTBPS) likely to dominate proceedings.
The market will look to the MTBPS to provide a more in-depth prognosis of South Africa’s post Covid-19 fiscal trajectory, including the spending and funding requirements of government’s recently announced economic recovery plan.
The Bureau for Economic Research (BER) said that particular focus will be placed on the extent to which Treasury sticks with the ‘active’ scenario outlined in June.
“(The June plan) stabilises government debt at about 87% of GDP by 2023/24 – (this) will be scrutinised for implementation potential and therefore credibility,” it said.
The BER said that greater detail on the medium-term expenditure and tax measures to achieve the active scenario will be welcome. In terms of the much-talked about tax plans – while tax announcements will most likely be left to the main budget in February 2021, the MTBPS may provide some hints, it said.
“Crucial will be whether Treasury sticks to the aggressive spending cuts from 2021/22 onwards that were outlined in the June supplementary budget.
“Subsequent to the June budget statement, there was a lot of scepticism on whether, relative to the 2019 MTBPS baseline, cuts in excess of R350 billion between 2020/21 and 2022/23 were feasible, or even desirable.”
The BER said that it shares these doubts, citing president Cyril Ramaphosa’s economic advisory council which proposes a more gradual approach to spending cuts in order to give the economy some breathing space to recover from the Covid-19 crash.
By comparison, based on recent academic studies, senior Treasury officials have argued that in recent times, the fiscal multiplier – the change in GDP in response to a change in government spending – has in fact been quite low in South Africa.
“Therefore, large expenditure cutbacks may not have an overly adverse GDP impact. The adverse GDP impact could also be reduced if the composition of spending can be improved with a larger focus on capital as opposed to outlays on current expenditure.
“Against this backdrop, we think Treasury is likely to largely stick to their guns on proposing aggressive expenditure constraint (with a better composition) from 2021/22 onwards.”
However, additional expenditure demands relating to SAA and financing Ramaphosa’s economic recovery plan, as well as a weaker real GDP outlook for 2020 than Treasury assumed in June, suggest that the starting point for the budget deficit may be even weaker than expected before, said the BER.
With this in mind, the group expects sizeable main budget deficits of 14.9, 10.8 and 9.3% for 2020/21 through 2022/23.
This results in the debt-to-GDP-ratio rising to more than 88% in 2022/23 – a weaker outlook than Treasury’s June active scenario.