South Africa is set to make an announcement about a new Covid-19 fiscal support package this week – including information on how the package will be funded.
This is badly needed as South Africa is falling behind when it comes to financial support but simply does not have the funds to introduce major measures the Bureau of Economic Research (BER) said in a research note on Monday (20 April).
Given the growing strain on the fiscus, the BER said that government will be forced to look to alternative funding avenues. These include the following possibilities:
- IMF/World Bank/Brics Bank loans. There have already been some announcements on this front with a $1 billion loan from the Brics Bank and a modest amount talked about from the IMF. More may/should be in the offing;
- Bilateral loans (say from the US, but perhaps more likely China);
- Selling off non-core state assets, i.e. privatisation;
- Large scale auction of broadband radio spectrum;
- Letting go of vanity projects such as SAA, a state bank and a sovereign wealth fund. Cabinet may already take a final decision on the future of SAA this week, although the BER said it would not rule out further dithering on the issue;
- Prescribed assets, i.e. nudging private and public (the PIC) pension funds and asset managers to hold a larger share of government bonds in their portfolios. Linked to this could be a tightening of the prudential limits. This implies reducing the offshore allocations of domestic pension and asset managers so that they have to hold a larger share of domestic assets (preferably bonds) in their portfolios;
- Increased SARB buying of bonds in the secondary market. Dipping into the SARB’s foreign exchange reserves and/or accessing Treasury deposits at the central bank could also be considered.
“In order to not distort normal market functioning, we think government will consider a mix of the above. This would be in line with President Cyril Ramaphosa’s speech on 9 April when he said that all of SA’s resources will be deployed to fight the coronavirus,” the BER said.
South Africa falling behind
Citing IMF data, the BER noted that South Africa’s fiscal support measures (expressed as a % of GDP) stand out as ‘particularly modest’ when compared to G20 countries.The numbers include revenue and expenditure measures, as well as loans, equity injections and guarantees.
“The problem is that South Africa entered the Covid-19 crisis in a precarious fiscal position,” the BER said.
“The February Budget outlined that South Africa’s debt-to-GDP ratio was expected to rise to 71.6% by the 2022/23 fiscal year. The Covid-19 crisis means that this projection will need to be revised substantially weaker.
“The February budget projected a main budget shortfall of 6.8% of GDP, or R368 billion in 2020/21. Based on our latest nominal GDP forecast, the deficit will be substantially more at R558 billion (11.1% of GDP).”
The BER said that this mainly reflects a huge hit to government revenue (with some provision for the tax relief already announced) and increased debt service costs.
“Bear in mind that our deficit forecast excludes additional fiscal support (expenditure measures), which will result in an even bigger shortfall,” it said.