Rating agency sends warning to South Africa after budget

Credit rating agency Fitch Ratings has warned that South Africa is not doing enough to contain its rising debt, despite better than expected revenue windfalls.

In a research note published after the national budget on Wednesday (23 February), Fitch said that South Africa continues to breach its expenditure ceilings – pointing to difficulties in containing spending. There is also a risk that recent strong revenue growth may prove temporary, it said.

The country’s improved fiscal performance had already contributed to Fitch’s decision to revise the outlook on South Africa’s BB- credit rating to ‘stable’ from ‘negative’ in December 2021.

The budget on 23 February shows the consolidated government deficit for the fiscal year ending March 2022 (FY21/22) at 5.7% of GDP – narrower than the 7.8% in the Medium-Term Budget Policy Statement (MTBPS) in November 2021.

“The new forecasts reduce the near-term risk that investor concerns about debt sustainability could lead to a further surge in borrowing costs in the context of global monetary tightening, and imply a further slowdown in debt accumulation,” Fitch said.

“However, officials still expect debt to continue rising, to a peak of 75.1% in 2024/2025 (MTBPS: 78.1%), and risks to the government’s expectation of debt stabilisation remain high.”


So far, the government has resisted pressure for a more comprehensive basic income grant, which would be significantly more expensive.

However, Fitch expects some form of a social grant to be made permanent, given pressures from exceptionally high-income inequality, unemployment that surged to 34.9% in 2021, and strong pressures for more social spending in the governing ANC.

This means the government will again breach its expenditure ceiling in the coming financial year as a result of the Social Relief of Distress grant extension, it said.

“These ceilings on non-interest expenditure, announced three years ahead, were introduced in 2012 and had been adhered to until FY19/20. That major overshoot, due to bailouts of state-owned enterprises, was followed by breaches in FY20/21 and FY21/22 driven by the Covid-19 pandemic, which caused disruption to public finances in many countries, and in FY22/23 due to the Social Relief of Distress grant.”

Although Fitch said it had anticipated the breach this year, it raises questions about the government’s ability to pursue fiscal consolidation if revenue forecasts disappoint or other fiscal risks materialise.

“Its fiscal consolidation strategy relies on containing public-sector wages, which have grown strongly in the past decade. While there are still risks from a pending constitutional court ruling, the government has been relatively successful in containing wage growth during the pandemic, but the recovery in economic growth and stronger public finances may make the public-sector wage negotiations due to start in March 2022 tougher.

“Unexpected additional needs to provide fiscal support to state-owned enterprises could also put upward pressure on debt.”

A more durable resolution of South Africa’s fiscal challenges in a difficult socio-economic context would require a substantial acceleration of economic growth, Fitch said.

“So far, government initiatives and progress on implementation has been insufficient to make this likely.”

Read: Winners and losers from South Africa’s budget

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Rating agency sends warning to South Africa after budget